It is critical that you grasp all components of a debt consolidation loan before continuing. Debt consolidation loans are a popular alternative to bankruptcy in Canada, but they have certain drawbacks. The following is a list of the benefits and drawbacks of debt consolidation loans.
In Canada, what is a debt consolidation loan?
A debt consolidation loan is a personal installment loan offered by financial institutions, internet lenders, and debt relief agencies that combines various debts into one. It essentially involves taking out a single loan to pay off all of your current obligations. If you have four distinct bills to pay (for example, two credit cards, one personal loan, and one school loan) with multiple payment due dates, a debt consolidation loan can help you combine everything you owe into a single monthly payment with a lower interest rate.
What motivates people to take out debt consolidation loans?
Debt consolidation loans give debtors much-needed breathing room in the face of mounting debt. Pooling all debt into one loan can benefit customers with debts of $10,000 or more, who are receiving collection notifications, or who have accounts with high-interest rates.
The main advantage of a debt consolidation loan is that it may help you achieve a lower interest rate on your debt burden while also simplifying your debt repayment schedule. While the interest rate on a debt consolidation loan may be lower than the interest rate on various debts, payments on a consolidation loan will most likely be spread out over a longer period of time, resulting in a longer (but more manageable) payment schedule.
It is vital to know that consolidating your obligations into a single loan will not eliminate your debt. Debt consolidation loans, on the other hand, assist Canadians in making all of their payments on time, which may help them save money on fees and increase their credit score in the long term.
You should always ensure that you will not be paying more interest with a debt consolidation loan than you are already paying on various accounts. You can use a debt consolidation calculator to do so.
Benefits of a Debt Consolidation Loan
There is less chance of missing monthly payments with a debt consolidation loan because you simply have one payment instead of several.
Furthermore, when debtors make many payments, they frequently accrue a significant amount of interest since they are unable to pay off each individual obligation—however, with a loan, there is just one straightforward payment, so interest rates are likely to be decreased each month.
Is debt consolidation bad for your credit?
If you make all of your monthly payments on your debt consolidation loan, your credit rating will not suffer. In fact, because you have lowered your interest payments, your credit rating may rise as a consequence of your new debt consolidation loan.
The Downsides of a Debt Consolidation Loan
- You may be needed to provide collateral to qualify for a debt consolidation loan. This might be a second mortgage on your home or a lien on your automobile or household goods. You risk losing your car, home, or household items if you are unable to meet your loan installments.
- Even if you might save money with a lower interest rate, consolidating your previous obligations into one loan will still result in a hefty monthly payment. If you have difficulty making payments on three or four small loans, you may still have difficulty making payments on one large loan.
- If you keep using your old credit cards and are not careful, you may slip even deeper into debt.
If you owe more than you can afford, a debt consolidation loan is an excellent alternative to explore. However, keep in mind that you have other alternatives, such as credit counseling, a consumer proposal, or bankruptcy, so we recommend that you consider all of your options before deciding which one is best for you.