Coping with different debt obligation can be a daunting struggle for many Canadians, and could be particularly overwhelming, when you are trying to keep your head above water. Sometimes an understanding on how debts works could be a propitious step towards rebuilding your finances. While debt consolidation can certainly help improve your finances, it is not a blanket solution for all financial challenges. If you are contemplating debt consolidation, we’ve outlined a few things you should know about debt consolidation in Canada, as well as its overall pros and cons.
What is Debt Consolidation?
It involves taking out one big loan, which you use to pay off your current debts while a flexible payment scheme is introduced allowing one payment to be made each month towards your consolidation loan.
A debt consolidation is helpful in that it accomplishes three things. First, it lowers your interest rate. A good debt consolidation loan has a lower interest rate than the credit cards you are consolidating, which saves you money in the long run because more of your payment will go towards paying down your debt. With the lower interest rate you’d get on a consolidation loan, your monthly minimum payment may be lower as well, making it easier to get your finances back on track. Lastly, debt consolidation also has the benefit of keeping your bill payments a bit easier to manage. Consolidating your debts eliminates the juggling; reducing the number of bills to just one! With only one bill payment to make each month towards your consolidation loan it makes it easier to focus on other financial matters.
How to Get a Debt Consolidation Loan: What’s Involved and What to Expect
Getting a consolidated loan is quite easy and straight forward, but not everybody meets the financial requirements. An acceptable credit rating is a prerequisite that qualifies applicant as lending institutions use credit score and payment history to determine risk. Also, steady income and loan security such as a car or vehicle could be reassuring. Prime lenders are not interested in household collateral for loan but subprime lenders may take this kind of security.
Requesting a credit card transfer consolidating all your debts into one card could help put your credit card rating in good shape which would improve your situation in the long run because more of your payment would go towards paying down the principle.
Another way is to cosign on the loan. A trusted friend or family with a high credit score can make the lender or financial institution more inclined to sign off the loan. However, it’s important to ensure they are aware of the responsibilities. In the event that you can’t make payments on the loan, your co-signer will be saddled with the responsibility. Also using property with enough equity as collateral can lower interest rate by alienating concerns about defaulting. In the event that you can’t pay back loan, your lender can sell property to get their money back.
Some Debt Consolidation Drawbacks
Debt consolidation can be a recommended course of action when encumbered with debts and soaring interest rates. However, it could be detrimental leaving you more in debt than you started.
Consolidation process can be more of a palliative rather than a conclusive solution in that you’ve merely shifted debt instead of addressing the underlying problems that created the debt. Closely monitoring unfavorable behavioral patterns could be decisive in preventing reoccurrence of financial quandary.
Consolidation loan could payoff credit cards, freeing up money thereby creating an increased temptation and propensity towards reckless spending. Also, consolidation suing home equity as security opens the alarming possibilities of decreased property value against bigger loans making loss of home imminent.
Tackling Your Debt with Other Options
If you’re struggling to keep up with your debt payments and you’re not in the position to take out a consolidation loan – or ask someone to co-sign for you — there are other options available to you.
Learn How to Budget and avoid stacking up More Debt
A carefully drawn budget helps curtail and regulate the most excessive spending habit thereby preventing you from running into a spiral debt. Budget provides better control over your money, helping you know exactly where your money goes – and which areas you can cut back on – so you can start making more payments towards your debt.
Reduce and Avoid Further Debt by Understanding Your Issues
Consolidation loan can solve financial problems and reduce debt. However, it is a gross misconception to assume that it would solve the issues that created the financial problems in the first place. If the reason for your debt and financial strain is due to a behavioral or psychological issue, it’s best to address that issue before implementing a financial solution. If the various underlying causes are not addressed, financial solution can’t yield results.
Talk to an Accredited Credit Counselor
Speaking with our accredited counselors offers dazzling opportunities as they can review your finances, draw up a workable budget, while showing all available options. Debt Management Program (DMP) is an option our counselors can help you look into.
DMP does not require loan as your Credit Counselor will negotiate lower interest rates and fees on your outstanding debts and once an agreement is reached, you’ll make a monthly payment to the credit counseling organization, and they in turn will disburse those payments to your creditors.
DMP offers little or no interest, and accounts and credit cards involved in the DMP will also be closed obviating the challenge of reckless spending and debt increment. DMP also provides continual financial coaching and support to help you improve your budgeting and money management skills. Working with a Credit Counselor would fast-track your recovery from debt, while fortifying you with tools to make perceptive financial decisions.
Some Final Thoughts on Debt Consolidation
Consolidation loan is very suitable if you are looking to reduce overall debt and organize your monthly payment obligations. However, it is merely a provisional arrangement that shuffles debts, as you will still be responsible for paying borrowed money. Consolidation loan provides more credit as you pay off creditors, consequently, increasing inclination towards excessive spending and intractable debt.
If you’re contemplating taking a consolidation loan as a means out of debt, consider making a free appointment to speak with one of our accredited Credit Counselors. They’ll walk you through your finances, help you create a realistic budget, present all your available options, and further explain how debt consolidation works.