Debt consolidation is the process of putting a number of debts into a single debt. This concept has been heavily promoted in recent times as the best solution fro borrowers who are struggling with their current level of debt.
Will you have lower debts after debt consolidation?
The process of debt consolidation in itself does not reduce the amount of overall debt that you carry, it only puts it into a single loan.
However there are forms of debt consolidation that are available to people who are in financial trouble and can not meet their set loan repayments – these can potentially result in your overall debts negotiated down to a lower amount as part of the consolidation process. This form of debt consolidations is known as a Debt Agreement and is only available to borrowers who are effectively insolvent and without such assistance would need to declare bankruptcy.
Will debt consolidation result in lower repayments?
Debt consolidation can result in lower repayments if the new loan that you end up with is cheaper or is spread over a longer period than the loans that you had initially. For example if you take several higher interest debts such as credit card debts, personal loans etc. and put these into your mortgage, your periodic repayments should be significantly lower. First of all, your unsecured debts are now being repaid over 20 years or 30 years instead of 3 – 5 years. Secondly they are incurring a single digit home loan interest rate instead of the double digit rate paid before consolidation.
Can you qualify for a debt consolidation loan?
To qualify for an unsecured debt consolidation loan you need to demonstrate a good credit history and a strong income position.
To qualify for a debt consolidation into your mortgage, you need to have sufficient equity in your home loan to absorb your other unsecured debts. The overall debt after consolidation needs to be below 90% of the home value.
This means that a large proportion of people carrying heavy debts are not able to qualify for a debt consolidation loan. However some will be able to apply for other forms of debt consolidation.
What can you do if you already have bad credit?
If you have significant unsecured debt but are not able to qualify for a debt consolidation loan because of your bad credit, there may the the option of applying for a debt agreement.
A debt agreement is an alternative to bankruptcy where your unsecured debts are negotiated down with your creditors on your behalf. The intention is to reach an affordable level of repayment that you agree to make to your creditors in full settlement of your debts. A debt agreement gives you the opportunity to freeze the interest accruing on your debts and come out of the agreement some years later , completely debt free.
However this debt consolidation alternative does mean that you are declaring yourself insolvent and as such your future ability to borrow will be impacted. Nonetheless if debt is a huge problem for you today, a debt agreement can be a very effective solution.