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Are You A Good Candidate for Debt Consolidation?


If you’re facing a lot of debt, you may consider debt consolidation instead of debt settlement for dealing with your debt. Debt consolidation doesn’t work for everyone, so make sure you evaluate the solution before you settle on it.

What is Debt Consolidation?

Consolidating your debts typically means you take out a big loan and use it to pay off your debts. It’s not like consumer credit counseling where the counseling agency typically takes over your payments. Instead, you would have a brand new loan and you would be responsible for paying your loan each month.

Debt Consolidation Loan

To consolidate your debts, you need to be able to take out a loan that’s large enough to cover all your outstanding debts. For example, if you have $50,000 in credit card debt, you need to qualify for at least a $50,000 debt consolidation loan.

What makes debt consolidation hard for many consumers is that it’s often difficult to get approved for a large, unsecured loan without having an excellent credit score and enough income to qualify for the loan. If you’ve missed some credit card payments, there’s a chance you don’t qualify for a debt consolidation loan because your credit score has suffered.

It may also be hard to qualify for a debt consolidation loan if you don’t make enough money every month to meet the lending standards. Even if your income is high enough, the lender may count your current debt load against you, even though you’re planning to use the loan to pay off your debt.

Consolidating With Home Equity

Another option to consolidate your debt is to use a home equity loan or second mortgage. For this option to work, you need to own your home and probably have enough equity to borrow against in order to consolidate your debt.

A home equity loan is often easier to qualify for than a debt consolidation loan because the home equity loan uses your home as collateral for the loan. The credit requirements aren’t likely as strict since the lender can foreclosure on your home if you don’t keep up with your loan payments.

The same thing that makes it easier to qualify for a home equity loan is also one of the things that can make it risky. If you default on your credit card payments, your credit score will drop, but the lender can’t just take any of your property. However, if you can’t keep up the payments on your home equity loan, you face the possibility of foreclosure.

Is Debt Consolidation For You?

Debt consolidation may be a better option than debt settlement if you qualify for a loan that’s large enough to pay your debts and the loan has a lower interest rate than what you’re paying on your other debts. If you don’t qualify for an unsecured loan, you may be able to use your home equity to pay off your debts, but make sure you’re aware of the risks involved with defaulting on such payments. Understand that you could lose your home if you miss payments on your home equity loan.

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