How does an unsecured debt consolidation loan work?

An unsecured debt consolidation loan works by combining more than two of your unsecured debts into one single loan. Since unsecured debts are based on your pledge to pay and your credit score, this means that you combining debts such as credit card, loans and medical bills. In other words bills such as mortgage and car payments are not included in an unsecured debt consolidation loan.

The goal of an unsecured debt consolidation loan is that it can lower monthly payments and extends the repayment period you have, according to Nolo. In other words, the way this loan works is that the new lender pays off all the debts that you've include in the new loan. So you won't have to worry about making individual payments to all the creditors. Instead, you make one monthly payment to the new unsecured debt consolidation loan lender.

Although the unsecured debt consolidation loan is a lower payment than you would normally make to all of your creditors, there is interest included. The actual interest rate may depend on you credit score. Thus, you may pay a high interest rate for obtaining an unsecured debt consolidation loan.

Before taking out this type of loan, you should talk with a lawyer. A lawyer will explain all your debt management options available to you besides the unsecured debt consolidation loan. For example, you could consider filing personal bankruptcy or paying off your debts one at a time.