If you’re wondering if getting a debt consolidation loan can help you avoid foreclosure proceedings, the answer is “Yes” if you can also answer the same thing to these 3 questions.
Are you willing to pay what you can to keep the house?
There’s a big difference between repayment capacity and willingness to pay. While your capacity to pay measures your ability to generate enough money to make debt payments on your debt consolidation loan, your willingness to do is a snapshot of your ability to keep your agreements. Borrowers are able to meet their financial obligations over a longer period of time when they are both willing and capacitated to repay their debts.
How do you compute your repayment capacity? To measure your ability to repay your principal debt plus interests based on your regular income, get your cash flow ratio. It is total income minus your total expenses, divided by your total liabilities.
Let’s say your annual income is $1,500,000 and your total expenses (including food, transport, medications and daily expenses) for the whole year $1,420,000. You have an outstanding credit card debt of $20,000, $50,000 unpaid mortgage dues, and $2,000 personal loans.
Your cash flow coverage ratio is 1.1 ($80,000 net income/$72,000 total debts). Your income is sufficient to pay your debts. But, the question remains-are you willing to wait until you paid off your $72,000 debts before using the $8000 leftover for your wants? If you’re willing to delay some of your wishes just to keep the house, then debt consolidation can really save your home from a repossession case.
Do you intend to apply for remortgage before you get into arrears?
If you don’t want to miss one or monthly mortgage repayments, you can apply for debt consolidation using your home equity.
By refinancing or taking out a home equity loan to pay off many other debts, including your existing mortgage, you can eliminate high-cost consumer debts (like credit cards) and secure a lower overall interest rate to the total debt load. Plus, you can enjoy the benefits of convenient and easy repayment of only one loan each month.
The debt consolidation process of second mortgage
By taking out a second mortgage to consolidate your loan, you are not only repaying your existing mortgage, but the bulk of the consumer debt, especially those with high interests. Reputable debt consolidation lenders will secure it as a second mortgage or home equity loan, putting up your home as collateral. It has overall lower interest rate, fixed costs to process payments and spreads your payment over shorter or longer period depending on your intention.
If you are willing to pay higher monthly repayments within a shorter period, you can save more on interests and fees, and you’ll eliminate your debt sooner. But, if you prefer smaller monthly payments, the lender can extend the loan period, with additional interests.
Do you avoid signing up to any schemes that seem too good to be true, no matter how tempting it is, until you get advice first?
If a lender offers you a short-fix to all your debts, without a debt management strategy, or convenient loan term that would encourage repayment, you’re likely to end up with more debts and homeless.
A good debt consolidation company tells you that you just moved your debt into one convenient loan to help you save money on interest and fees, and make it more affordable for you. So, beware of consolidation companies with hefty fees and hidden interests and penalties, and loan terms with foreclosure as the first resort when you default on payments.
When consolidating your loans, make sure that you have a debt management plan that includes a profit plan. Profit—because it talks about your income and what you can do to increase it, while making payments for your loan. If you will just rely on your current income, it may take a while to finally get back on your financial standing. But, if you will take an additional job, take on extra gigs and start a small business to grow your money-you’ll probably solve some of your financial issues the soonest time possible. Of course, there are risks involved in starting a business or pursuing passion that earns money at the same time, but a sound financial life is worth the risks.
There are also people who landed in multitude of debts because of things outside their control such as identify theft, lending to wrong people and job loss. But, even then, all types of borrowers need a debt management strategy to back up debt consolidation plans.
We offers tips on how to manage your debts, which include lifestyle changes and starting off new money-saving habits that will make your debts disappear earlier. Make an enquiry today and our friendly specialists will answer all your questions about debt consolidation loan and other loan products.