Unsecured Debts

What Is Unsecured Debt?

The total U.S. consumer debt, excluding mortgage debt, reached $2.46 trillion in June 2007 [Source: http://www.creditcards.com ]. Credit cards continue to be a significant contributor to unsecured debts. An average American holds 2.7 bank credit cards and 3.8 retail credit cards, according to an online article on savings and debt [Source: http://moneycentral.msn.com ]. In 2007, the average household held a credit card debt amounting to nearly $8,500 [Source:  http://www.money-zine.com ].

Advantages of Unsecured Loans
The advantage of taking an unsecured loan is that you get financial help or money, immediately. It is usually easier to apply for unsecured loans as compared to secured loans. A major reason for this is the lack of any kind of collateral. Because you do not have to pledge your property or any other asset to take an unsecured loan, these loans can cut down on the time and documentation needed for their processing.

At times, unsecured loans are taken to fulfill financial obligations on other, secured loans. For instance, you may opt for a credit card loan to avoid defaulting on your home loan payment. Personal events such as a divorce or a major illness suffered by a spouse can significantly reduce cash inflow into a household. Due to the stress associated with them, such events could also severely impair the earning capacity of people affected by them. Many people resort to unsecured loans to help them get through money problems during these difficult times. Dependence on an unsecured loan may also increase when a member of a household becomes unemployed.

Unsecured Loans – A closer look
The interest rates charged on unsecured loans are very high. Also, late payments attract an increase in interest rates, at times as much as 30%. Considering that a creditor has no pledged asset to recover money, you may have to file for bankruptcy, to get out of a bad debt liability. There are a few other options you may consider before filing for bankruptcy:

• Debt settlement: With debt settlement it is possible to significantly lower the debt balance by making a one-time payment towards full settlement of the debt. The settlement amount is mutually agreed upon by the debtor and the creditor.
• Budgeting: Manage your finances by creating a budget. Make an effort to set aside about 5% to 10% of your income in savings. This helps in creating an emergency fund which can be used if required, instead of a credit card. Creating a budget is not easy, but you can contact credit counseling service agencies like CESI for free budgeting advice if needed.
• Debt Management Plans: Through a debt management plan you can consolidate all your debts into one single debt and pay off all your creditors systematically. A credit counselor may help you manage your debts and effectively plan your finances to remain debt free.

An unsecured loan can turn into a bad debt, unless finances are managed carefully to ensure all bill payments are made in a timely manner. Be aware that credit card companies may raise the interest rate on all your cards if they see a pattern of late payments. Apart from hurting your finances further, this reflects badly on your credit score. A survey conducted in 2007 revealed that nearly 25% of 1014 respondents were concerned about how they would pay credit bills every month, while 3% said that at times, they cannot even make the minimum payments due [Source: http://www.bankrate.com ].

To learn more about managing your unsecured debts with a debt management plan, contact CESI.