Can Credit Score Be Affected by A Debt Consolidation Loan?

What better way to start the year right than by taking care of your debts and working your way to better financial management, right? However, things are not as easy as it seems more so if you’re worried about whether getting a debt consolidation loan will negatively affect your credit score. Can getting a debt consolidation loan help you improve your credit score?

The short answer is yes although it may initially look like a no. When you get approved for a debt consolidation loan, there will be an initial decline in your credit score because it looks like you’ve incurred more debt. However, as you pay off your existing debts with the funds from your loan, you will see a gradual and steady improvement in your credit score as long as you do not get more debt and continuously work on a repayment

How Does A Debt Consolidation Loan Work?

When you get a debt consolidation loan, what you will be doing is essentially converting your high-interest debts into a single debt with a lower interest rate. Because of this, it will be easier for you to make payments for as well as track them. You will save money on interest and be able to use the savings to pay off the principal, thereby repaying your debt little by little. Another benefit is that a debt consolidation loan will have a lower monthly payment than the combined monthly bills for your high-interest loans. If you stick to the payment plan, you’ll find that your debts will be paid off faster too.

What Are Your Options for a Debt Consolidation Loan?

Not all debt consolidation loans are created equal. Some are easier to qualify for and some are easier to pay than others. The most popular ones are listed below:

  • A personal loan can allow you to enjoy a slightly lower interest rate and an easier time to manage a single bill.
  • Balance transfer credit cards have introductory periods that feature almost no interest if you meet the set requirements. They buy you some time to help you have a head start on payments.
  • Retirement account loans let you tap your retirement fund. Failure to pay this back can incur heavy penalties and taxes.
  • A HELOC or home equity loan allows you to have access to your home equity if you are a homeowner. These loans are easier to qualify for and have friendlier interest rates but know that failure to pay may result in you losing your home.

How Debt Consolidation Affects Credit Scores

A new credit application can mean that you will have a temporary lowering of your scores by a few points. If you’ll be opening a new credit account like a personal loan or a credit card, you will likewise experience a temporary lowering of your scores since you have a new debt. When you make payments on time and your credit ages, your score will rise. Know too that a debt consolidation loan will help you show improved payment history and give you a lower credit utilization ratio.

Is it Worth It to Apply for a Debt Consolidation Loan?

The answer is yes if you will be using a source of funds that will be most beneficial for you. If you’re a homeowner in Toronto or the GTA who is interested to apply for a debt consolidation loan using your home equity, contact us at Mortgage Central Canada for fast approval!

Ways to Access Your Home Equity in 2021

Not a lot has changed when it comes to using your home equity in 2021 although the situation this year might be totally different to previous years. Basically, the ways that a homeowner can access home equity remains as getting a HELOC, applying for a second mortgage, getting a home equity loan, and opting for a mortgage refinance.

What Is A Home Equity Loan and How Does It Work?

Any loan that uses the value of your home as collateral can be classified as a home equity loan. It is a secured loan wherein the lender will let you borrow a certain amount of money based on the value of your home equity. Payments are in installments and come with interest.

To get a home equity loan, you need to have the home that you own appraised, have a significant portion of your mortgage paid, and be in a financial position that allows you to pay back loans. With this, you can borrow up to 80% of your home equity and use the funds for anything that you want.

What Is A HELOC and How Does It Work?

A HELOC or a home equity line of credit is a revolving loan is that is backed up by your home equity. This is different from other loans as you can keep using the line of credit as you make payments or until you reach the limit.

Most HELOCs are from banks and alternative lenders. You also need to have your property appraised and have significant home equity of around 20% to 30% or more because it serves as the security. This gives you access to about 65% of your home equity.

What Is A Mortgage Refinance and How Does It Work?

A mortgage refinance is a new mortgage loan created to replace your existing mortgage. This allows you access to your accumulated home equity although you’ll be limited by the terms of the lender and your home appraisal.

Note that the required payments for a mortgage refinance will be large and that your equity will decrease. More so, you might need to pay a fee for breaking your existing mortgage.

What Is A Second Mortgage and How Does It Work?

A second mortgage is another loan taken against your home that has an existing mortgage in place. Your home acts as collateral and the new mortgage is paid on top of the existing mortgage, giving you two mortgages to pay off. Failure to pay can mean a foreclosure as your lenders will try to recoup their losses. The interest may be a bit higher than a first mortgage because the lender for a second mortgage faces a higher risk of nonpayment.

Use Your Home Equity in 2021

If you are from Canada and want to use your home equity this year, simply contact us at Mortgage Central Canada. Our offices are open for consultation and we will answer questions that you may have. We are glad to help you in these trying times.