Debt Consolidation – Is it right for you?
If you are struggling to manage your debt, a debt consolidation loan might be a good alternative to filing for personal bankruptcy. If you still have a good credit score and a steady income, a debt consolidation loan can be a good solution to paying down your debt.
What Is A Debt Consolidation Loan?
A Debt consolidation loan is a private loan used to combine multiple debts into a single debt with a single monthly repayment.
If you owe $15,000 to three different unsecured creditors like your credit card company or an installment loan, you go to your bank or another lending institution and borrow $15,000 and pay off the three existing accounts. Your cards are then paid in full and you’re left with one monthly payment, to the loan provider.
A consolidation loan can help you better manage your debt by lowering your monthly payments and giving you only one monthly bill to pay.
Do You Qualify?
There are two types of consolidation loans – secured loans and signature only loans.
Secured Loans. In order to qualify for a secured loan, you need good credit and an asset worth at least as much as the loan to ‘secure’ it. In our example, if you have $15,000 or more in equity in your home or car, you could use that equity to guarantee the loan. If you’re credit score has suffered due to your financial difficulties, you may have to pay a higher interest rate for borrowing.
Signature Only Loans. If you have excellent credit, you may get a signature only loan for a smaller amount. All that means is the loan is guaranteed only by your signature. Signature only loans are rare and often come at a higher interest rate.
What Kinds of Debts are Included?
You can use your consolidation loan to pay off any outstanding debts you have. Once the loan is secured, it is yours to pay off what you need.
What are the benefits of debt consolidation?
Convenience. One of the major advantages of debt consolidation is convenience. Instead of juggling creditors and writing multiple checks each month, you’ll only need to write one check to your loan provider.
Potential Savings. By paying off your credit cards in full, you’ll be saving on the high interest rates they charge. You’ll also avoid any late payment and over the limit fees.
In addition, if you credit score qualifies you for a lower rate, you have additional opportunities to save. By paying one payment each month, it’s likely you’ll free up some extra discretionary income. Check with your loan lender for prepayment penalties. If the loan terms allow, use some of this ‘extra’ money to pay your loan back faster and save even more.
Improve your credit score. With fewer bills to manage there are fewer opportunities to pay your bills late. On-time payments are a critical component of your credit score. With only one bill to pay each month, building up a new history of on-time payments can get you on the road to improving your credit score quickly. In addition, a debt consolidation loan won’t show up as a negative entry on your credit score like a consumer proposal or bankruptcy will.
Stop collection calls. A consolidation loan can put a stop to those harassing collection calls. While this type of loan doesn’t provide legal protection against creditors in the way that a bankruptcy or proposal does, if it allows you to pay your balances in full, there will be no need for collectors to contact you. Be sure to submit your loan payment on time each month to avoid calls from your lender. Once you’ve paid off your debts, be sure to check your credit report to ensure that it’s been updated to reflect your new zero balances.
What are the disadvantages of debt consolidation?
You Still Owe the Debt. A consolidation loan does not actually provide debt relief, it provides relief from the payment of debt. You still owe the entire amount, you’ve just restructured the way you pay it back making it easier to afford and manage them payments.
Your secured asset is at risk. If you fail to meet the terms of your loan, the asset that you put up as collateral for the loan will be at risk of repossession.
You haven’t fixed the root of the problem. Something got you into trouble with credit in the first place and a debt consolidation loan doesn’t address that. In fact, a consolidation loan can get you into even more trouble if you don’t address the issues you may have with credit management. Now that you’ve paid off your credit cards, your credit card balance sheets read zero. You now have wide open lines of credit that might be tempting to use. For some unfortunate borrowers, these lines of credit become too tempting to resist and they start to use the cards, racking up new debt. The only difference now is that you still have your consolidation loan to pay and now your home or other secured asset is on the line.
Credit counseling can be a great companion to debt consolidation so that you can avoid the same financial pitfalls that got you into trouble in the first place.
It may not actually save you money. While you might be paying less each month, the overall cost of your loan might end up costing you more. A lower interest rate on a larger amount over a longer period of time might well add up to more than you would be spending if you just paid your credit cards individually. But if it’s month to month relief you’re looking for, a consolidation loan might work for you. Do the math and compare which option would work best for you.
Make Your Consolidation Loan Work FOR You:
Here are some tips for helping you make sure a debt consolidation loan works for you instead of against you:
1. Don’t wait to investigate a consolidation loan.
2. Calculate the total repayment cost of the loan against the cost of your existing credit accounts.
3. Learn more about the proper use of credit.
4. Cut up excess credit cards and limit yourself to one card.
5. Prepare a personal budget and stick to it.
How Personal Bankruptcy Canada Can Help
Canada debt consolidation loans seem like a great way to deal with mounting debt, but many times you may be back in deep financial trouble a few years after taking out the loan. You may want to discuss your situation with a bankruptcy trustee to explore this option and determine if it is a good fit for you before you pursue a consolidation loan. The trustees at Personal Bankruptcy Canada offer free initial consultations at which you can review your financial situation in detail with a trusted professional. There is no obligation to choose a solution or to continue to work with your trustee.
Other Debt Consolidation Resources
- Office of Consumer Affairs Debt Consolidation Information
- RBC Royal Bank Debt Consolidation Info
- Office of Consumer Affairs
- CIBC Debt Consolidation Calculator
Learn more by contacting a bankruptcy trustee for a free initial consultation.
Page Updated: 8/19/2013