How to Refinance and Combine Debt

Your debt to income ratio is too high, you pay most of your income on bills, you are worried about losing your home and your car is about to be repossessed by the lender. It's a nightmare scenario that many Americans have faced, and there seems to be no way out. Combining debt is called "debt consolidation," and this may provide you with a solution. Debt consolidation works by combining all your existing debts into one amount. You take out a loan or mortgage to pay off all the debts, and you make a single monthly payment against the loan.

Instructions

1

Check your credit score. You must be able to show that you have tried to maintain your payments in order to get a consolidation loan. You can obtain a free credit report online from one of the three national consumer reporting companies, or by sending a request by post to the Annual Credit Report Request Service in Atlanta, Georgia.

2

Prepare a full list of your debts. Include details on which debts are secured against an asset, such as a home mortgage or vehicle lease agreement, and which are unsecured such as credit cards and personal loans. Include information about the remaining terms of agreements and the outstanding balances.

3

Draw up your monthly budget, showing all current income and expenses as well as your debt repayments. Potential lenders will want to see exactly how much you are able to pay each month once your debts are consolidated.

4

Look for lenders that offer credit specifically for debt consolidation. Institutions that specialize in this type of credit include banks, consumer finance companies and credit unions. Make appointments with several institutions and take your documentation along when you go to see them.

5

Speak to your mortgage company about refinancing your home. If you have been paying your mortgage for several years, your home may be worth more than you owe on it, and a second mortgage or a refinance may provide the funds you need to pay off your other debts. Mortgage interest is usually lower than interest on a personal loan because it is a secured loan, so this might be the solution.

6

Investigate lenders that offer loans in spite of bad credit scores. Pay attention to the terms and conditions of an agreement with such institutions and the rate of interest that is quoted, because a bad credit loan is a higher risk for the lender and generally attracts a higher rate of interest for this reason.

7

Take the draft agreement to your legal adviser to check before signing. He will make sure you are not at risk of losing your home or other assets as a result of the loan.

8

Sign the final agreement, obtain the loan and pay off all your debts. Make regular payments against the consolidation loan or refinanced mortgage. Your credit score will be improved by having reduced your level of household debt and having paid off your creditors.