Chris Welker explains how consolidation loans can be a good option, but if your credit score is hurting or you don't have any assets, you likely won't qualify for the loan.
What is a Consolidation Loan?
Debt Consolidation Loans are a popular debt management option for people who are experiencing money problems.
Using a consolidation loan to manage your personal debts will:
- Consolidate your personal debts into one monthly payment
- Reduce interest charges
- Will not damage your credit rating
What issues may I run into if I use a consolidation loan to address my money problems?
Difficult to qualify for loan:
- Must have an excellent credit rating
- Collateral is often required (house equity, car, etc.)
- May need a co-signer
Not always a complete solution:
- Creditors will often consolidate their own debts but not others
- Not a good option unless all personal debts are included
Affordability of payments:
- Payments include 100% of amount owed plus interest
- Higher payments than other debt settlement options
- Calculate Payments
When is a Debt Consolidation Loan a good option?
- More assets than personal debts (not insolvent)
- High income and can afford to pay all debts including interest
- Own assets that can be used as collateral for loan
- An excellent credit rating
What issues may arise if I use a second mortgage as a Debt Consolidation Loan?
- May not have enough equity to consolidate all debts
- High interest rates
- Can affect your ability to sell your property in the future
- Amortizes debts over a long period of time
- If property is owned jointly and debts are in one spouse’s name the second mortgage will cause both spouses to become liable for debts
What if a Debt Consolidation Loan isn't enough?
Debt Consolidation Loans and second mortgages can be a good a debt management option provided that you qualify, they consolidate all debts, and the payments are affordable. If your debt consolidation loan only gives you enough money to pay some of your creditors or the payments are unaffordable you should consider other debt settlement options such as filing personal bankruptcy or making a consumer proposal.