Is Debt Consolidation Right for You?

Are you bogged down with multiple bills that are long overdue?

Have no clear answer to how you will be able to pay them amid other new and existing recurring expenses?

It may just be time for you to consider consolidating all your debt.

Debt consolidation generally means collecting all your bills and loans into one large pool and to make one monthly payment for it with the lowest possible interest rate.

This means that you don’t have to fret about how many bills you have and the amount you owe.

You only need to worry about this consolidated debt that will generate a single payment for your convenience.

Since you are not flooded with a multitude of bills, you may also be able to get out of debt faster.

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Taking a debt consolidation loan is the ideal way to combine all your bills.

This type of loan is unsecured and does not require you to set aside any collateral.

The approval of the loan solely depends on your credit score.

How does the debt consolidation loan work?

Once you apply for this category of loan, your lender will pay off all your existing dues, or only the ones you wish to pay for.

This would mean you would never be troubled by the different parties that you owed money to.

Once the bills are paid for by the lender, the total sum will be collected into one and made into a single loan for which you will pay fixed monthly installments.

However, the approval for the loan and the interest that is charged every month will depend on how good your credit score is.

Additionally, you cannot consolidate loans that are secured, meaning the ones that have a collateral attached to them like a home or car loan.

What Types of Loans and Bills Can Be Combined Through a Debt Consolidation Loan?

As part of this loan, one can combine all personal loans that are unsecured and linked to the credit store.

Even previous consolidation loans can be added into the new one.

Apart from personal loans, here is a list of other bills and loans you can include:

1) Public utility debts

2) Unsecured lines of credit

3) Retail store cards

4) Gas cards

5) Credit cards

6) Tax debt

7) Child support arrears

How do you benefit from a debt consolidation loan?

There are various advantaged of opting for this type of a loan instead of paying for several bills and loans individually.

If you wish to improve your financial situation, this is the best option.

Not only will this help you increase your savings, in the near-term, it will also help you boost your credit score, meaning lenders would find you more trustworthy.

This would mainly happen since all your debts have been paid for, save for one which is the consolidation loan.

Also, since you won’t have to keep track of a huge number of different bills, you will not forget any payment, thus preventing unnecessary harm to your score.

Secondly, in some situations, the total interest paid for a debt consolidation load is lesser than that paid when you are juggling various bills.

This translates into more savings on a monthly basis, which you can dedicate to other expenses, or hold onto to for tough times in the future.

However, if you wish to pay the same amount monthly, you may even be able to pay back all your loans earlier than you would have if you would have paid all your bills individually.

The major draw of the consolidated loan is that you don’t need to remember and keep track of all the credit card bills, outstanding utility bills and more.

You only have to remember to pay the monthly installments of one loan which improves your life and makes the daunting task of paying bills a convenience.

After you choose a debt consolidation loan, you only owe one party, compared to the several in number before.

This means that you won’t get calls from the creditors if you haven’t been able to pay to even one of them.

The consolidated loan reduces your stress as all these collectors have been paid and so you won’t be bothered by them.

To reinforce your future and that of your loved ones, it is crucial that you have a plan in place for your funds.

However, if you drowning in bill after bill every month, your budgeting goes awry, forcing you to take rash short-term decisions that further reduce your credit score.

However, a debt consolidation loan put a stop on your immediate worries of bills and puts you back in the driver’s seat of your finances.

What are the limitations of a debt consolidation loan?

While it may sound convenient, the most crucial facet of this loan is that you still have to pay a similar amount of money each month.

This may make it difficult for a person who is not in a condition of paying even half the bills that the he or she has outstanding.

In fact, to actually make a consolidation plan work for you, you will need an interest rate that is not very high.

However, for this to happen you need a credit score of at least 650 or more.

For an interest rate that is the lowest possible for this type of loan, you need a credit rating of 720 and above.

The consolidation loan is the most beneficial if you end up with an interest rate of around 10 percent or below.

Another important point to remember is that your monthly total payments may only decline depending on how much you owe to your creditors in the first place.

Lenders usually offer a period of up to 60 months for such loans.

So if you owe a huge sum of money, even stretching it to 60 equal monthly payments would result in payment which are equal to or higher than what you usually paid before consolidation.

So before you opt for a debt consolidation loan, ensure that you have the capacity to pay a huge sum every month.

Non payment of the monthly installments could further dent your credit score.

You also need to remember that the consolidation loan will only take care of your outstanding credit card dues and not the ones that will accrue in the coming months.

This means that all your purchases using your credit card after the loan has been consolidated will appear in the bill next month along with your monthly payment for the loan.

Hence you must avoid any charges to your credit card after the loan has been made.

This could be challenging if you are very used to spending on daily expenses using a credit card.

A downside to the debt consolidation loan is that it is not necessarily a quick fix to all your debt woes.

You may not have collectors calling you regularly, but it may still take a long time to pay back the consolidated loan.

However, this type of loan is one of the best options to pay back your loans without hurting your credit score.

Are there other options like a debt consolidation loan?

Certainly there are.

They offer similar benefits, but vary in some way or another.

One option is to choose a balance transfer credit card.

Balance transfer credit cards if your credit score is high enough, also give you a 0 percent annual percentage rate for a period of 6 to even 18 months from the time you open your account.

However, there is usually a cap on the debt you may have to qualify for this solution.

It is generally only for $ 5,000 or less.

Another alternative to a consolidate loan is a debt management plan, which doesn’t completely pay off your bills, but sets up a program of repayment over a period of time that is suitable to you and your creditors.

For this, you have to hire a credit counselling agency, which won’t have any prerequisites like a strong credit score.

However, you may have to show proof that you earn enough monthly to make your payments.

The agency will work with you to see what amount would be suitable for you to pay every month considering your monthly expenses and your income.

Then the agency will contact your creditors to see if they would like to work together and reduce interest levied so that you can pay back without much stress.

This method is also suitable since it doesn’t impact your credit score as you make regular payments on time.

Also, this is an ideal option for those that don’t have a good enough credit score to get a consolidation loan.

While these alternatives sound good, don’t be fooled into opting for a debt settlement option.

This is nothing like a debt consolidation because in the case of a debt settlement, you don’t pay the entire amount back to your creditors.

This means you only pay a partial sum, which seriously damages your credit score, impacting how you borrow money in the future.

You should read the terms carefully before opting for debt settlement and must ideally keep this as your last resort to paying back bills.

Information on Consumer Proposals

Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
How to Amend a Consumer Proposal
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
Consumer Proposal Eligibility
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?

Canadian Bankruptcies

How to File for Bankruptcy
What is Bankruptcy?
Bankruptcy FAQs
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?

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