Between a monthly, annual or weekly payment, it can be difficult to find our way through our various financial obligations. Luckily, we can take advantage of financial tools that allow us to combine different payments into a single payment.
Debt consolidation is a useful financial tool that combines multiple loans into a single account so that we can keep better track of payments and manage finances more easily.
How do you know that you are in need of debt consolidation? If your monthly loan payments are more than 20% of your regular income (not including your mortgage), it may be a sign that you are in financial distress. You don’t want to wait until debt collectors start calling because you can’t keep up with your loan payments.
In the following article, we’ll show you how you can simplify your debt payments to ease your budget and avoid stress.
With debt consolidation, you can put your finances back on track and make budgeting for financial obligations a lot simpler.
How does debt consolidation work?
If you are finding it hard to pay your loans (mortgage, credit cards, car loan, personal loan, etc.), it may be time to consider debt consolidation.
A debt consolidation loan is money you borrow to pay off all your debts so that you can make only a single payment. This means all of your other debts will be closed and you will be paying singly for this new loan. In many cases, a debt consolidation loan has better terms and conditions to ease your financial burden.
If you have multiple debts to pay each month, you can merge them into one loan. Ideally, you use debt consolidation to pay off high-interest debts so you are left with only one debt at a lower interest rate. Usually, the interest rate is 12% to 14% a year, depending on the lender of your choice.
The Pros and Cons of Debt Consolidation
Major Canadian banks such as RBC, TD, BMO, CIBC, and credit unions offer debt consolidation loans.
Weigh the pros and cons of this financial strategy to see if it is right for you.
Advantages of Debt Consolidation | Disadvantages of debt consolidation |
One Monthly Payment for multiple debts. This reduces the stress of keeping track of due dates and making multiple payments. | Some lenders may require collateral or a co-signer. This is why many people choose to consolidate their loans using home equity.
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Lower Interest Rate. You can find interest rate with a consolidation loan that is lower than high-interest rate loans such as credit cards and personal loans. | You need to have an acceptable credit score to get approved. If your loan accounts are already past due, you may be denied a new loan. |
Faster loan repayment. You can pay off your debts faster with a fixed monthly payment. | You may find yourself deeper in debt if you continue to use your credit cards or get new loans. |
Savings. You can potentially save money with a consolidated loan because your interest rate is lower. | If you consolidate loans with your mortgage, it will take longer to pay off your mortgage. |
Debt consolidation is a financial tool you can use to reduce financial stress and improve your financial health.
When is debt consolidation a good solution?
This question is a good one and it is something you should ask before you proceed. Every situation is different and debt consolidation is recommended under certain conditions.
It can be advantageous to proceed with debt consolidation since…
- This allows you to make a single payment each month.
- Normally, your payments will be lower.
- With a lower interest rate, more of your payment is allocated to the principal.
However, like many things, debt consolidation does not only have advantages. It can bring significant problems that you should not underestimate.
- If you fail to include a debt/s with your consolidated loan, you may continue to experience hardship in paying it off.
- If you continue to incur new debt or loans, you will have a bigger financial burden to carry. You must be ready to change your spending habits until your financial situation has improved significantly.
It is up to you to evaluate whether your situation will improve with debt consolidation. We further recommend that you speak to our partner financial experts who can give you the best advice to your situation.
You can fill out the short online form on this page to receive FREE and NO-OBLIGATION offers from our reputable partners.
Add your debts to your mortgage
Do you have a mortgage? If you have sufficient equity in your home, you can consolidate your debts with your mortgage.
Many people prefer this option because mortgage interest rates are generally lower than other types of loans.
Mortgages can also be repaid for a longer period of time so you can have lower payments with your other loans.
If you apply for a debt consolidation with your mortgage lender, you will be making a new application and must qualify to be approved. If you are given a new loan, your mortgage payments your mortgage term will increase.
On the positive side, you will be making one single payment for your loans with your mortgage lender and could save a lot of money on interest payments.
What are other debt consolidation options?
If you don’t like the thought of incurring a new debt to pay of existing debts or not thrilled at putting your mortgage at risk, you can explore other options.
Credit card balance transfer. If you have multiple credit card accounts, you can apply for a balance transfer at a lower interest rate. You can combine all your credit card debts under just one card and make a single payment each month.
It goes without saying that you should not use your credit cards and make new purchases to prevent your credit card from ballooning again.
Home Equity Line of Credit (HELOC). Also called a second mortgage, this type of credit uses your home equity to obtain a new loan. Used properly, a HELOC is a valuable tool to simplify your debts.
Debt consolidation programs. You can also work with a non-profit debt counseling service who will negotiate with your creditors to consolidate unsecured loans into a single payment, usually with little or no interest.
Always remember that the objective of debt consolidation is to allow you to improve your financial situation, not to make it worse. If you get into more debt after you get a consolidation loan, your goals are completely defeated.
Thus, you need to be fully committed to improving your spending habits and regularly pay your consolidated loan.
FAQS on debt consolidation to guide you
Debt consolidation can be an appealing solution when you are in despair over your debts. It is important, however, to fully understand what you are getting into before taking the plunge.
Here are some frequently asked questions about debt consolidation to guide you.
Can I use a debt consolidation loan to pay off secured debts?
Some lenders may agree to include a secured debt such as a car loan or a mortgage in a debt consolidation loan. Keep in mind that secured debts usually have low interest rates compared to unsecured debts such as credit cards. Thus, prioritize unsecured high-interest rates when getting a consolidation loan.
Can you consolidate student loans?
Student loans generally have lower interest rates than a debt consolidation loan. Therefore, it does not make sense to consolidate student loans.
How much does a debt consolidation loan cost?
Reputable lenders generally don’t charge fees for a debt consolidation loan. As to how much you will pay each month, it depends on your total loan amount, payment term, and interest rate.
Is it difficult to get a debt consolidation loan?
It can be difficult to get a debt consolidation loan because you need to have an acceptable credit score. Since most people who are considering debt consolidation are in financial distress, some of them get denied. Lenders may also require collateral.
We recommend not to wait until matters are worse before considering a debt consolidation loan. You can protect your credit by acting early at the first signs of financial distress.
What is the difference between a debt consolidation loan and a debt consolidation program?
A debt consolidation loan is a type of loan provided by banks and credit unions, usually secured by collateral. The purpose is to pay off multiple loans under one account with a single payment. It is credit-based and approval can be hard to obtain because lenders will look at your finances before you are approved.
A debt consolidation program, on the other hand, is a debt-relief counseling service. A debt counseling agency will handle all the steps, including negotiating with your lenders, so you can combine multiple debts under one account. Certified credit counselors will work with you to find an ideal solution to your debt problems. The goal is to allow you to make regular debt payments you can afford so that you can get out of debt.
What types of loans are usually included in debt consolidation?
Unsecured debts have the highest interest rates and are, in general, the most ideal to consolidate. These include payday loans, personal loans, salary loans, credit card loans, etc.
What are the requirements for a debt consolidation loan?
Lenders usually look at 4 things to approve a debt consolidation loan – credit history, financial capacity, proof of income, and equity or collateral. Lenders have different criteria so it is advisable to consult a financial professional when considering a debt consolidation loan.
Get Debt Help for a better life now with our Financial Partners
Are you starting to get collection calls? Do you feel panicky when bills become due? Get debt help now for a brighter and better future.
Consider consolidating your unsecured debts such as credit cards or personal loans to lower your monthly payments and interest payments.
Our partners are experts at finding debt consolidation solutions to help you manage your debt and rebuild your finances. They will evaluate your financial situation and offer the best solutions to put you back in control of your money.
Debt consolidation is a much better alternative to filing a consumer proposal or bankruptcy which will put limits on your life.
Don’t wait until it is too late and act now so you can sleep better at night and feel more in control.
Just fill out our short online form to receive FREE and NO-OBLIGATION offers from our partners today regarding debt consolidation solutions.
