Are you having trouble keeping up with all your debt payments? If yes, you should consider using one of the many debt relief options available to Canadians. Some common debt relief solutions include debt consolidation, debt management, debt settlement, a consumer proposal and in extreme cases bankruptcy. Depending on your situation, one solution will provide better financial relief than others. If you’re looking for a less severe option, then a debt consolidation loan could be a good option for you.
A debt consolidation loan is a loan (either secured or unsecured) you use to pay off any high-interest debt you might have. The idea is to combine or consolidate existing loans into one larger, more affordable, and easier to manage loan. The end goal is to save money on interest and hopefully become debt-free quicker.
A debt consolidation loan works just like any other type of loan. But in this case, once you’ve been approved you’ll use the money you receive to pay off any high-interest debt you have. This can be credit card debt, personal loan debt, and any other type of debt that is eligible. Keep in mind that certain types of debt, think car loans and mortgages, cannot be paid off with a debt consolidation loan.
Check out this guide on loans in Canada.
To demonstrate the savings of a consolidation loan, let’s say you have two credit cards with one holding a balance of $3,000 and another with a balance of $2,000. Assuming you’re making monthly payments of $200 to each credit card, how long will it take to pay it off, and how much interest will you pay?
Similarly, we’ll calculate how long and how much it would take to pay off the credit cards if you consolidated it into a personal loan. For this example, we’ll assume you’ve secured a 2-year personal loan with an interest rate of 7.5%.
| Credit Card 1 | Credit Card 2 | Consolidation Loan | |
| Loan Amount | $2,000 | $3,000 | $5,000 |
| Interest | 19.99% | 19.99% | 7.5% |
| Monthly Payment | $200 | $200 | $225 |
| Number Of Monthly Payments | 12 | 18 | 24 |
| Total Paid | $2,205.97 | $3,480.98 | $5,400 |
| Total Interest Paid | $205.97 | $480.98 | $400 |
As you can see in the table above, by consolidating your loan, you would save $286.95 on interest and you’d be paying $175 less each month. The only downside is that you’d be making payments for a longer period of time.
However, if you lower your term to a year and increase payments to $434 a month, you can pay off your loan within 12 months, and only pay $208 in interest.
Ultimately, when it comes to applying for a debt consolidation loan, you will find there are many options to choose from. This is why it’s important to consider the following three factors when determining which options are best for your needs.
There are a few ways you can consolidate your debt. Depending on the type of method you choose, it will come with its own advantages and disadvantages.
A personal loan, from a bank, credit union, or alternative lender is a popular way to consolidate debt. However, in order to qualify for a big loan amount with a low-interest rate, you’ll need to have a good credit score and an income large enough to pay off your new payments. You can also improve your chances of securing the loan by offering some form of collateral like a car or by getting a co-signer.
If you currently own a house then you can use your home’s equity to consolidate your debt. Your home’s equity is the portion of your home that you actually own. This means that if your home is worth $250,000 and you’ve paid off $100,000 of your mortgage, you currently have $100,000 worth of equity in your home.
You will use your house’s equity, as collateral, to gain access to your equity (the $100,000) to consolidate all your debt under one new loan. This is obviously only an option for those who have a mortgage and own a house but it can be a great option for someone struggling to get their debt under control. However, it’s important to remember that, if you’re unable to make your payments your house can be seized as collateral to pay off your debt.
If you’re particularly struggling with a lot of credit card debt. You can opt for a credit card balance transfer. This form of debt consolidation allows you to consolidate all your credit card debt by transferring your balances to a new credit card at a very low rate. Typically credit card balance transfers have rates that start as low as 0% for a period of time (usually between 3 – 6 months). This can save you a lot of money on interest. But, if you’re unable to pay off your debt during the introductory period, you should consider consolidating using a personal loan.
Banks and credit unions want debt consolidation loan applicants to have good credit. This means if you have poor credit you likely won’t get approved for a debt consolidation loan from one of those financial institutions. But, this doesn’t mean you can’t consolidate your debt. Individuals with low credit should consider the following options if they are looking to consolidate high-interest debt:
Here are some of the advantages that come with taking out a debt consolidation loan; they should help you make the best choice for you and your financial situation.
While a debt consolidation loan is a great option for many consumers, this option is not without its disadvantages. Here are some of the disadvantages you should know about before you make any decisions.
Like with all loans and financial products, it all depends on your unique situation. But, there are things most lenders are looking for, which can help you be prepared when applying for a debt consolidation loan.
If you approach a bank for a debt consolidation loan you’ll need to meet the following requirements:
We know most of those requirements seem intimidating. But the good news is that getting a debt consolidation loan from a bank is only one of your options. You could instead look into getting a personal loan from a private lender or even ask someone to co-sign a debt consolidation loan.
Choosing to consolidate your debt with a loan is a big decision, that’s why it’s important to know exactly what’s going on with your finances; here are a few steps you should take before you make any final decisions.
Once you’ve determined what the main source of your debt is, you need to figure out the best course of action to get your finances back on track.
Everyone’s financial situation is different, which means that a debt consolidation loan may not be the best option for you. But, if you feel as though you could benefit from a debt consolidation loan and are interested in learning more, we can help.
Everyone’s financial situation is different, which means that a debt consolidation loan may not be the best option for you. But, if you feel as though you could benefit from a debt consolidation loan and are interested in learning more, we can help.
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