Can a Secured Debt Consolidation Loan Be Utilized for Anything?
You can use proceeds from a secured debt consolidation loan for any legal purpose. However, in order to gain approval for the loan, you may have to agree to use some of the proceeds to pay off certain existing debts. Generally, if debt payments are a condition of the loan, the lender disburses funds directly to pay these loans off immediately after the loan closing.
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Home Secured Loans
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Debt consolidation loans often take the form of a mortgage or a home equity loan secured by residential property. You can take out a cash-out refinance in first or second lien position, and you can attach loans to either a residence or a rental property. Generally, a cash-out refinance loan amount cannot exceed 80 percent of the property's value if secured by a primary residence, or 75 percent on a non-primary home. You can pay off an existing first lien mortgage with a cash-out loan and use the remaining proceeds to consolidate other debt.
Other Collateral
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People sometimes refinance their cars to extract equity and use that money to consolidate other debts. Typically, cars are less expensive than homes, which means people with significant amounts of debt usually do not have sufficient equity in their vehicles to consolidate all of their debts.
The Internal Revenue Service enables people to take out loans against 401(k) retirement accounts. You can borrow up to $50,000 with a 401(k) loan although the loan amount cannot exceed 50 percent of your total 401(k) balance.
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Debt To Income
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When you apply for a debt consolidation loan, the underwriter examines your debt-to-income ratio. This ratio reflects your monthly debt payments as a percentage of your overall monthly income. Maximum DTI levels vary from bank to bank, but typically, your DTI ratio cannot exceed 50 percent. The lender does not include payments tied to debts that you intend to pay off with the loan as part of the DTI equation. However, to ensure the debts are paid off with loan proceeds, the lender makes the payment directly and you only receive the portion of the loan proceeds not being used to settle existing debt.
Debt Consolidations
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Many people pay off student loans, credit cards and other unsecured debts with proceeds from debt consolidation loans. However, before paying off debts, you should look at your overall financial situation. Home loans typically last for 15 or 30 years, so it may not make sense to pay off debts with terms lasting a few years with a loan on which you must pay interest for up to 30 years. Additionally, if you secure a loan with your car or home, you risk losing your car or home if you ever fall behind with the payments.
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