Figuring Out If You Qualify for Debt Consolidation
Many people are looking to use debt consolidation as a way to better manage debt or to lower overall payment amounts. However, not just anyone can consolidate debt. There are requirements to be met.
What kind of debt do you have?
Interestingly, Chris Bibey points out on the Bankruptcy & Foreclosures blog, you can’t usually consolidate secured debt. Car loans and home mortgage loans cannot be wrapped up with other loans. You have to consider the type of debt you have before you can get approved fro debt consolidation. Credit card debt and other unsecured debt — such as payday loans or medical bills — can usually be consolidated. However, there are other considerations when it comes to qualifying for debt consolidation.
Can you get a debt consolidation loan?
Right now, it is somewhat difficult to get a debt consolidation loan. It is possible to qualify for a loan, but you will need to make sure everything is in order, especially if you plan to use a second mortgage loan in order to secure your debt consolidation loan. Here the biggest concerns any lender will have when arranging debt consolidation loans:
- Home equity: This is important if you plan to secure your debt consolidation with a second mortgage loan. You have to have sufficient equity to be able to cash out and cover your other debts. This is difficult right now, since home values have fallen.
- Credit score: Even with sufficient equity, or if you try to consolidate without using a second mortgage loan, you still need to have a good credit score. Most lenders want to see at least a 680 before helping you with these types of loans.
- Debt-to-income ratio: Your lender will want to know that you can handle the payments. Many lenders are going back to an old rule of thumb that states that no more than 30% to 36% of your monthly income is taken up in making debt payments.
Before you apply for a debt consolidation loan, make sure that you double check your situation. You can even talk with a financial professional to get a true idea of your options.
