Loan consolidation can sometimes be an excellent way to avoid high interest rates and stiff penalties for outstanding debts. Basically, debt consolidation loans and debt consolidation home equity loans involve taking out one loan with more manageable terms to pay off outstanding debt that you’re struggling to keep up with.
Consolidation loans can come from both banks and private lenders.
Banks are usually much more restrictive in issuing consolidated loans, often requiring a spotless credit record (meaning that if you’re being harassed by creditors, it’s likely too late) and either collateral (such as home equity) or a co-signer (who would be responsible for repayment if you’re unable to meet your obligations, even if you file for Bankruptcy).
You may recognize private lenders from their radio and television ads that can seem a little too good to be true. A private lender will usually be easier to get a loan from, but will typically cost you more, through higher interest rates and signup and management fees. They will often require that you secure the loan with physical assets, which might otherwise be protected.
Taking out a consolidated loan that you can’t afford can actually be more unfavourable than declaring Bankruptcy outright. That’s why it’s important that you speak with a Licensed Insolvency Trustee at Fuller Landau before pursuing a consolidated loan. We’ll ensure that you don’t take on a consolidated loan that will leave you worse off than you started.
Consolidating Debt Through Home Equity
If you are fortunate enough to own a home, it is likely your most valuable asset, and as such, you may be able to borrow against it to pay off your debts. When considering this, we strongly recommend that you consult with one of our Licensed Insolvency Trustees, as failure to pay back your loan could result in losing your home altogether.
Refinancing and Second Mortgages
If you already have a mortgage, you may be able to negotiate a second mortgage with your bank, to borrow against the portion of your home value that you have already paid off. Much like consolidation loans from your bank, the likelihood of securing a second mortgage and the rate of interest that you end up paying can depend heavily upon your current credit rating.
This is often the preferable course of action because the interest rates are considerably lower than unsecured loans, but they often have associated setup fees, and usually have a significant minimum loan amount.
Mortgages From Sub-Prime Lenders
Similar to consolidated loans from private lenders, mortgages acquired from private investors can be easier to acquire than second mortgages from banks. However, they can have significantly higher interest rates.
This higher interest rate is meant to correspond with the higher risk associated with lending to individuals with poor credit.
Selling Your House to Pay Your Debts
Whether it’s a last resort or a planned downsizing, a solution may very well be to sell your current home and move to one that is less expensive, using the difference to pay off your debts. This will prevent you from having to take on a high-interest mortgage or loan to pay off your debt. This is often something that a debtor intends to do anyway, whether it’s moving to a smaller home after their children have moved out, or moving outside of the city after they retire.
Understanding Your Options
If you’re feeling overwhelmed by debt and would like to explore a debt consolidation or home equity loan, or would like information on your other debt relief options, contact us today for a free consultation.