Debt Consolidation Loans are a popular debt management option for people who are experiencing money problems.
Using a consolidation loan to deal with your personal debt problems will:
- Consolidate your personal debts into one monthly payment
- Reduce interest charges
- Will not damage your credit rating
The issues with using a consolidation loan to address your money problems are:
1. Difficult to qualify for loan:
- Must have an excellent credit rating
- Collateral is often required (house equity, car, etc.)
- May need a cosigner
2. 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
3. Affordability of payments:
- Payments include 100% of amount owed plus interest
- Higher payments than other debt settlement options
- Calculate Payments
A debt consolidation loan may be a good option if you have:
- More assets than personal debts (not insolvent)
- High income and can afford to pay all creditors including interest
- Own assets that can be used as collateral for loan
- An excellent credit rating
The issues with using 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
The Bottom Line
Debt consolidation loans and second mortgages can be a good a debt settlement 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 including filing personal bankruptcy or making a consumer proposal.
