What is Debt Consolidation?
Debt consolidation is a type of debt restructuring in which you take out a new loan to pay off your current loans. Instead of multiple payments with different creditors, you will only have one monthly payment to make. Now you can take better control over your credit card bills and pay off your debt effectively.
How Do I Consolidate My Debt?
If you have multiple debts that have become difficult to keep track of, there are a few different ways to consolidate them into a predictable and manageable monthly payment.
- Home Equity Loan
Also known as taking out a second mortgage, a home equity loan can provide lower interest rates and a way to get a handle on your credit card debt.
- Line of Credit
A line of credit from a bank or credit union can help you pay off high interest debt. The key is to make sure you’re disciplined enough to pay down your line of credit quickly by making much higher than the minimum payments consistently.
- Debt Consolidation Loan
If you have decent credit and good collateral (security for the loan), a debt consolidation loan will help you pay off higher interest debts and focus on a single monthly payment. Most banks or credit unions will lend people around 10% of their net worth.
- Credit Card Balance Transfer
Transferring debt to a credit card with a lower interest rate can help if you have a plan for paying off your debt within a reasonable time period. Keep in mind that once the promotional period is over, interest rates will go back up to around 20% and you could end up owing more in the long run if you aren’t careful.
- Debt Management Program
Some provinces offer Orderly Payment of Debts programs that will help you reduce or eliminate interest and consolidate debt payments into one monthly payment. A debt management plan can also help you better understand how you got into debt in the first place and make sure you don’t make the same mistakes again.
- Home Equity Loan
What are the Benefits?
If you’re feeling overwhelmed by bills, a debt consolidation strategy can help you get organized. Benefits of debt consolidation include:
- Planning out your finances becomes easier because you only have to make one debt repayment a month.
- You’ll get your debt under control before bankruptcy is the only option.
- You’ll pay off your debt faster by lowering your monthly interest rate and improving your credit over time.
- High interest debt will be eliminated faster, which means you’ll save money in the long run.
What are the Risks?
A risk to debt consolidation could be premature confidence in your debt situation. You may feel your debt situation is under control, but if you fall back into bad spending habits, you can incur more debts and put yourself at a greater risk.
If you are concerned about this, talk to your local Licensed Insolvency Trustee and he or she can come up with a debt repayment plan or recommend credit counseling services to help you pay off your debts effectively. Creating and sticking to a budget that prioritizes paying off your debt ensures the development of healthier financial habits that will serve you well in the long term.
How Do I Apply for a Debt Consolidation Loan?
You can apply for a debt consolidation loan at any financial institution including your local bank, a credit union, or any lender with enough support to finance your loan.
If you go with another lender, make sure to provide your monthly budget and a pay stub to show evidence that your income can cover the loan. A co-signer may be required to guarantee your loan. Other documents you may need to bring with you include:
- Information on assets
- Recent income tax assessments
- Current debt statement
Once you are approved for a debt consolidation loan, one of two things will happen. The bank or credit union lending you the money will either use the funds to pay down the debts you agreed on, or they will deposit the funds into your bank account, and you’ll be responsible for utilizing them as you see fit.
Is Debt Consolidation the Right Solution for Me?
Deciding to take out a debt consolidation loan can be a difficult decision so let us help you with any concerns you may have. Book a free confidential consultation with your local MNP LTD Licensed Insolvency Trustee to discuss how debt consolidation can reduce your loan payments, compare other options for debt relief, and ultimately resolve your financial challenges.