Consolidation Loans (unsecured)

An unsecured consolidation loan is a loan that pays off other debts like credit cards, but is not a loan against your home or personal property. An example would be an unsecured loan or line of credit with a bank or credit union. A consolidation loan only makes sense if the interest rates and terms are more favorable than the interest rates and terms you have now.


  • If the new loan has a more favorable interest rate, it will save you money.
  • If the new loan has both a lower interest rate and a decent length of repayment you may be able to significantly decrease your monthly payments. Use loan calculators found on the Internet to be sure.


  • If your credit is already in bad shape, you may not be able to get a consolidation loan with good terms.
  • It is never wise to incur new debt when you are struggling. When your credit card balances are paid off by the loan, the temptation may be to use the credit cards again.
  • Be sure the new loan payment can fit into your spending plan without using new credit to fill in the "gap".

What to Avoid

  • Avoid not knowing exactly what your monthly payment will be under the new loan and being sure that you will be able to afford it.
  • Avoid high interest rate loans and loans from companies contacting you through the mail, Internet, or by telephone.
  • Avoid further use of credit.
  • Investigate and know your lender before entering into a loan.
  • Avoid any loan that will not allow you to pay off the debt in a reasonable amount of time.

What to Look for

  • Look for answers before you sign any loan paperwork.
  • Read all the small print and be sure you understand all of the terms.
  • Look to a source you already have a relationship with such as your bank or credit union.
  • Be certain you can afford the monthly payment and the loan will pay off in a reasonable amount of time.
  • Many financial calculators are available on the Internet. Use them to compare the terms of your old credit versus this new loan.

Potential Impact on Your Credit

Transferring balances may or may not affect your credit score. However, closing credit accounts or opening new credit accounts is likely to negatively affect your credit rating. If you are consolidating, consider paying off long-standing accounts without closing them to avoid an adverse impact on your credit rating. Increasing your debt load overall is also likely to have a negative impact on your credit rating. Many people who consolidate their debts rather than re-budgeting to reduce expenses end up increasing their debt load, which usually has a negative impact on credit.