Debt Consolidation Loans: A Popular Alternative to Filing For Bankruptcy
A debt consolidation loan is a large loan that allows you to combine several smaller debts into a single monthly payment.
Generally, you want to get a debt consolidation loan because you have high interest debts, while your consolidation loan has a lower interest rate.
Another benefit of consolidating your debts, is that you will only have 1 payment to keep track of, instead of several different payments throughout the month, which makes it easy to accidentally miss a payment.
The concept is simple, but being approved is often more challenging.
When you qualify for a debt consolidation loan, you use the money to pay off your debts.
For example:
“You owe $10,000 on 1 credit card, $15,000 on a second credit card, have a $500 payday loan, and owe the CRA back taxes of $3,500.
In this case, you will reach out to your bank, or another lending institution, for a $29,000 debt consolidation loan, that you will use to pay off your credit card debt, tax debt and your payday loan.”
Many people seeking such a loan have poor credit which can make it challenging to get approved for more credit.
Before you determine if seeking a debt consolidation loan is right for you, you should consider your options, the benefits of using a loan and whether you will qualify.
Will I Qualify For Debt Consolidation?
You can get a debt consoldiation loan through your bank, at a credit union, and other finance companies.
A secured debt consolidation loan might be easier to qualify for.
To qualify for a consolidation loan:
- You need a good credit score.Without good credit, you likely won’t qualify for a debt consolidation loan, or you will be charged an interest rate that makes it worthless to get a loan.In this case, you should seek another way to get debt relief, such as a consumer proposal, or filing personal bankruptcy.
- You may need assets that you can use for security to obtain a good loan.
- You must have certain types of debt; you cannot pay off secured debts such as your vehicle loan, or mortgage with a debt consolidation loan.
What are the Benefits?
- One monthly payment.A big advantage of a debt consolidation loan is that you only have to worry about 1 simple monthly payment, rather than having to keep track of multiple payments, often with different payment dates.With only 1 payment to make, it is easier to stay on top of your debt.
- Lower monthly payments.By consolidating your debts you can replace high interest rate debts with a lower interest rate loan that allows you to lower your monthly payments.
- Save on interest payments.By consolidating your high interest credit card debt into a bank loan or a second mortgage with a low interest rate, you will save substantial money on interest charges over time.
By paying off your new loan as quickly as possible, you will save even more on interest payments.
What Else Do I Need to Know About Consolidating My Debts?
Debt consolidation can often seem like a good way of dealing with your debts, but not everyone will qualify, and some companies offering loans are better than others.
If you are considering taking advantage of a debt consolidation loan, you should:
- Beware of Debt Consolidation Programs.A debt consolidation program is not the same as getting a loan, so if you are not receiving more funds to deal with your other debts, you are not consolidating your debts.
- Shop around for the best rates.You do not have to accept the first offer if the interest rate is too high.Also beware of up front fees related to consolidating your debts.
- If you are dealing with a serious problem, debt consolidation might not work for you, and you will be trapped in debt for many years.In this case, you should consider another way to get out of debt.A consumer proposal is a great way to get out of debt, and will often cost less and help you get out of debt sooner than consolidating your debts in many cases.
