Growing debt is a concern for an increasing number of Canadians. This is why borrowers have turned towards debt consolidation. It allows borrowers to take out a bigger loan to pay off smaller debts like minor loans, debts, and due bills. The smaller debts consolidate as one big debt with only one monthly payment scheme.
However, it is technically impossible to consolidate loans because each loan has its own period, interest rates, and payment terms and conditions. Thus, people need to take out larger loans to pay off these smaller loans at once. They use this to settle credit card debts, bills, payday loans, or overdraft balances.
A debt consolidation loan is offered by many banks, credit unions, mortgage companies, and other financial companies. You can better understand debt consolidation at alpinecredits.ca and start the journey of paying off all your minor loans.
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Multiple Reasons Why People Get Debt Consolidation Plans
Financial burden makes daily life a hassle and when you have multiple impending payments lined up in a month, it gets even more complex. Here is why people opt for a debt consolidation loan.
- Debt consolidation can get your financial system simplified. Rather than keeping track of multiple installments and interest rates, you can keep track of just one.
- Debt consolidation can also help you solve your constant cash crunch by lowering the overall interest rate. (But that is dependent on the partner you chose).
- It can even pay off your debts faster. But this works only if you secure a lower interest rate. This way, you get more time to repay your principal amount rather than just focusing on paying the interests. As long as you do not opt for any other loans, you can become loan-free much sooner with a debt consolidation loan.
- It also helps improve your overall credit scoreas a consumer. Once you consolidate your loans, your credit card will take an initial dip. However, if you pay each installment of this loan on time and stick to sound financial habits, your score can get better in months.
- You can pay back everything you owe at multiple places in one go and not get overcharged for the high-interest rates.
Debt Consolidation Prerequisites That You Must Have
A debt consolidation provider will have a set of guidelines for you to qualify for a debt consolidation scheme. Here are the essential prerequisites to get started.
- Decent credit score
- You have to be an earning individual with a stable income
- A detailed report of the mortgage on your house
- A proper evaluation of your home or other real estate property you own under your name
- A feasible debt
- Good personal credit to asset ratio
Things You Need To Be Careful About
Taking out a debt consolidation loan does not solve your financial problems with a miracle. You need to take a look at these disadvantages and have concrete plans to mitigate them before they curveball into another debt.
- If you take another loan before paying this debt consolidation loan, your interest rates and payments shoot up. You need to take charge of your finances and pay off this loan before taking others.
- Missing any payments will have a negative impact on your credit score and can put you in further depth. You can not have a faulty payment system when you opt for a debt consolidation plan.
- You may have to pay more interest rates on the debt.
However, these can be avoided with better financial planning.
Different Ways To Get The Right Debt Consolidation For You
There are multiple ways to consolidate your debts in Canada. You can choose an option best suited to your situation.
Home Equity Loans
This is also known as getting a second mortgage on your home/residential property. When you have good equity in your home, this is the best way to get a low-interest rate. This simply means taking out a loan against your home equity to pay off multiple existing debts. As you keep repaying the loan, the equity in your home releases, allowing you to borrow more (if required).
Line Of Credit
This works when your bank or credit union provides you with a line of credit to help you pay off your debts. This can be secured or unsecured, depending on your lender. It is a blanket amount assigned as a loan. However, interest is only charged on the amount you actually use. Once you repay the loan, the credit is released (just like a credit card), and you can make fresh borrowing.
Credit Card Balance Transfer
Many credit card companies offer balance transfer options at lower interest rates to settle long-standing debts. You can use this opportunity to transfer high-interest credit card dues to low-interest ones. However, make sure you pay these bills at the earliest.
Is Debt Consolidation Right For You?
Debt consolidation is a lifestyle choice and not a temporary fix. It warrants a change in your spending and financial habits. If you take out a consolidation loan and fall back on old financial habits, which led to the accumulation of debt in the first place, the loan would not make much difference. You would soon find yourself in debt again and the cycle would continue.
Thus, debt consolidation is right for you if you are willing to manage your finances better. If you are looking for a temporary solution, tapping into your home equity or taking out a line of credit would be a much better choice.
Endnote
Debt consolidation is a great way to take charge of your finances and make a streamlined plan to work through your small debts. It has many upsides, like better credit scores, lower monthly interest rates, and streamlining monthly payments.
If you are having trouble deciding whether you should take out a debt consolidation loan, consult a professional now. You need to make a list of pros and cons and get all your documents in order before you start this journey.