What is a Consolidation Loan?

If you’re having trouble keeping current with your monthly bills, there are a number of things you can do to keep yourself out of personal bankruptcy. If your financial situation is such that there is no possibility of generating additional income or reducing your expenses enough to get current with your bills you can get professional help through a credit counseling service or a licensed bankruptcy trustee.

Bankruptcy trustees do more than just bankruptcy – they also can help you file a consumer proposal, where you will pay back your creditors a portion of what you owe over time. Credit counselors can help you with debt management plans or debt settlement plans, which are similar but do not afford legal protection. All of these negatively impact your credit rating to varying degrees, so a debt consolidation loan is can be a better alternative.

To a large extent the option you select will depend not only on how much you owe, but also on how much you own. If you have substantial equity in your home or in other assets you own like cars or valuable collectibles, a debt consolidation loan might be your best option. First, let’s define “equity.”

If you owe $30,000 on your home and it is worth $150,000 in the current real estate market; you have $120,000 equity in the home. If you have current debts totaling $50,000 you could go to your own bank or to another lending institution and take out a debt consolidation loan to pay off the $50,000 you owe, using the equity in your home.

To find out what your home might be worth at no cost to you, contact a professional real estate agent. They can do a CMA (Comparative Market Analysis) which will show what similar homes in your area have recently sold for. Most lending institutions will require their own real estate appraisals, but a CMA will at least tell you whether your home is worth enough to even consider a debt consolidation loan.

The important thing to remember about debt consolidation loans is that they don’t reduce your total debt. Instead of paying five different creditors, as an example, you are now combining what you owed those creditors into a single loan and a single loan payment to another creditor. If the majority of your debt is with credit cards, some lending institutions might require that you close some of those cards to avoid getting back into debt problems by charging up those cards again!