Explaining Debt Consolidation

| | 3 minute read

Combining All Your Debts into One Can Help With Payments

As expenses build up, many people resort to taking out several loans and credit cards. This can lead to many debts spread across a lot of lenders. Each of these debts will carry different conditions and interest rates.

Over time, these debts become difficult to manage and this is where debt consolidation can help.

When you consolidate your debts, you bring them all together. As a result, this creates a single debt with one monthly repayment. For this reason, it can make the payment process simpler and reduce the stress attached to debt.

How Can You Get Approval For Debt Consolidation?

Debt consolidation loans often have very rigid requirements. This is because borrowers looking for these loans have a lot of risk attached to them. Lenders see a lot of loans and debts and become wary of the borrower’s behaviour.

On a general level, the lender will want a borrower to do the following:
• Show consistent payment of a home loan for at least six months.
• Have no record of missed payments with the lender in question.
• Maintain a record of on-time credit card and personal loan payments. This record should extend back at least three months.
• Have a strong credit report.
• Earn enough income to cover the payment of the debt consolidation loan.
• Show a consistent employment record. Ideally, the borrower will have worked with one employer for several years.

Major lenders usually won’t budge on these criteria. Therefore, if you can’t meet them, it may be best to speak to a specialist lender. Talk to an expert if you are uncertain.

How Much Can I Borrow?

This depends on the lender. For example, some will offer debt consolidation loans up to 90% of the value of your home. Others will have lower limits.

Lenders want to see evidence that you won’t allow debt to mount up again. You must also have equity in a property. Without it, you can’t get a debt consolidation loan.

Here are some general loan limits:
90% Loan: You should have a clear credit history that shows you make on-time payments for your loans and debts.
80% Loan: Some missed payments are allowed. However, you should still have a mostly stable record of making payments.
75% Loan: If you miss a lot of payments on every debt you have, the loan value decreases.
You will need to show you can afford the new loan. Further, the lender needs to be sure that you won’t spend more than you earn in the future. A professional can help you explain your debts and increase the chances of getting a debt consolidation loan.

A Word on Equity

The lower your home equity, the less chance you have of getting a debt consolidation loan. You may be able to write off part of the debt. Unfortunately, this isn’t an option for most borrowers with low equity.

How Does Debt Consolidation Benefit You?

You may wonder how rolling your debts together could help. After all, you still have to pay the same amount.
Debt consolidation comes with several benefits to you. They include the following:
• Easier management of your debt.
• More affordable payments.
• Protection against bankruptcy and creditors.
• Lower interest rates, in some cases.

Further, debt consolidation helps you take control of your income and often saves money. This results in less debt-related stress.

The Next Step

All of the information provided here is general in nature. In short, if you want to find out more about debt consolidation loans, talk to an expert.

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Alexi Neocleous

With over 20 years experience, Alexi has written extensively a wide cross section of financial topics. These topics range from financial planning, mortgages, property commentary and all points in between.

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