Have you found yourself with too much debt and no idea how to pay it off? Maybe you’re currently in this situation because of a job loss, a bad business deal, too many loans, or too much credit card debt. Whatever the case may be there is always a solution, even for the most dire of circumstances. Before you consider a consumer proposal or even bankruptcy you need to think about debt consolidation.
Debt consolidation is when you consolidate or combine all your debts under one larger loan so that you only have to make one easy-to-handle monthly payment; typically, the main goal is to get a lower interest rate so you can pay off your debts quicker. You can apply for a specialized debt consolidation loan that is specifically meant to help those who need to work on paying down their debt.
In order to consolidate your debts must be unsecured. This means that mortgages, car loans, and home equity loans cannot be consolidated. The most common types of debt that consumers consolidate are:
If your credit has been damaged because of the debt load you’re currently carrying, it is still possible for you to consolidate your debt. Typically banks and other traditional financial institutions are looking for average to good credit when approving debt consolidation loan applications. This means if you have bad credit you generally need to look at an alternative option for debt consolidation.
For people with bad credit, we suggest that you get in contact with a professional credit counsellor or a company with a debt consolidation program as they will be able to help you throughout the whole process. A credit counsellor will help you manage your money and debt as well as plan a budget for you.
Debt consolidation loans are a great option for many people who are currently being weight down by debt but they’re not the only option. If you have bad credit and are looking for a debt consolidation loan alternative, consider these options.
If you own a house and are struggling with too much debt, tapping into your home equity to consolidate your debt is a great option. A home equity loan is a type of secured loan which means those with poor credit may find it easier to get approved. The size of a home equity loan depends on the value of the house and how much mortgage has been paid down. These types of loans are unique to the specific borrower, this is why it’s important to speak with a lender, like Alpine Credits, to learn more about your home equity loan options.
If you don’t want to work with a credit counsellor or a debt consolidation firm you can always take out a small personal loan and consolidate your debts on your own. Just make sure the interest rate isn’t higher than the ones you already have. Consolidating your debt with a higher interest rate will end up costing you more and consolidating with the same interest rate is frankly a waste of your time.
This option is the best choice for those who do not have too much debt they wish to consolidate, as getting approved for a large loan when you have a lot of debt is often quite difficult.
While we wouldn’t necessarily recommend this for everyone, if you can find a credit card with a low-interest rate then it might be a good option. Just remember that transferring the balance of one credit card to another is called a balance transfer and comes with its own set of fees so it might not be worth the extra cost.
If you’ve decided that using a credit card to consolidate your debt is the best option for you, look for a credit card company that offers a card with any or all of the following features:
Certain credit card companies will run special promotions for new customers wherein they offer them a specific period with zero interest. If you’re going to use a credit card to consolidate your debt this is the deal you need to be on the lookout for.
This option is great for those who need money management help as well as debt repayment help. You’ll work with a counsellor who negotiates with your creditors, creates a repayment plan for you, and helps you work out a budget.
With a debt management program, all your eligible debt is consolidated into one monthly payment. You’ll make this payment to the credit counsellor you’re working with who will then distribute it to your creditors. Most credit counsellors can negotiate a reduction, of up to 100%, in their client’s interest rate. In order to be able to enter a DMP, your creditors will have to agree to the terms that your credit counsellor offers them. Most consumers who enter DMPs to consolidate their debt are debt free within 3-5 years.
If you think your credit may prevent you from getting approved for a debt consolidation loan, you should check it before applying. There are many free options available for consumers to check their own credit scores.
If you have poor credit, then you may want to consider improving your credit before applying for a debt consolidation loan. While improving your credit is always a good idea, you may not have the time to do so. Just remember that if your credit is so low that you can’t qualify for an interest rate that is lower enough to make the process worth it, you need to consider you’re alternative options.
Before applying for a debt consolidation loan, it’s important to know how much debt you have. Most lenders will ask how much debt you have to pay off. Remember that only unsecured debt can be consolidated.
Now it’s time to find a lender to work with. If your credit is fair to good, then a debt consolidation loan from a bank is the best option. Essentially one you already have a relationship with. Next, compare alternative lenders online, and look at interest rates and fees to make sure you find an offer that works for you. If you’re unable to find a debt consolidation loan that meets your needs, you should consider the additional options outlined above.
As there are a number of different debt consolidation loan options available, the cost can vary greatly from borrower to borrower. When determining if a debt consolidation loan is right for you and will actually help you save money and pay off your debt, consider the following features carefully:
If you’re currently considering debt consolidation and feel as though it’s the right option for you here are a few of the advantages you can look forward to:
Whichever option you choose, be sure to search for the best loan terms. It should be your number one goal to get a lower interest rate, no matter what option you go with. You should also make sure to get the best monthly rate for paying off your debt. Choose a monthly sum that works best for you as debt consolidation is meant to make your debts manageable. In the long run, debt consolidation will help you maintain your credit score. Having bad credit doesn’t mean you should give up paying back your debts. Finding the best option that works for you can help you take control of your debt and start to restore your bad credit.
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Caitlin Wood is the Editor-in-Chief at Loans Canada and specializes in personal finance. She is a graduate of Dawson College and Concordia University and has been working in the personal finance industry for over eight years. Caitlin has covered various subjects such as debt, credit, and loans. Her work has been published on Zoocasa, GoDaddy, and deBanked. She believes that education and knowledge are the two most important factors in the creation of healthy financial habits. She also believes that openly discussing money and credit, and the responsibilities that come with them can lead to better decisions and a greater sense of financial security.
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