If you feel overwhelmed with various debts and liabilities, it may be time to pay them off by integrating your debts into a single debt consolidation loan. This converts your different debts into a single loan. You need to deal with just one lender to make payments towards the debt consolidation loan till it is paid off.
This article will discuss six basic things you need to know about debt consolidation before your foray. Also, if you reside in Ontario and are looking for experienced debt consolidation partners, you are in luck. Visit Alpine Credits for more information.
Types of debt consolidation loans
In a broad context, secured and unsecured are the two types of debt consolidation loans. While a secured loan is secured by one of the borrower’s assets – such as a car or a house – as collateral, unsecured is not. Due to this primary difference, unsecured loans are significantly higher-risk investments than secured loans.
Naturally, this makes secured debt consolidation loans much easier to obtain, have lower interest rates, higher qualifying amounts, and longer tenure as compared to unsecured loans. Although, with either type of debt consolidation, loan rates are mostly fixed and significantly lower than credit card rates.
Where can you get a debt consolidation loan from?
As a first step, you can apply through your credit card company, a credit union, or the bank. It works well if you have a good working relationship with your financial organization.
In case the above options do not work out, you may still be able to avail a debt consolidation loan from private lenders or mortgage companies. Even though banks and other financial organizations are the foremost authority in issuing debt consolidation loans, there is also a range of debt consolidation providers that offer the same suite of services to the public.
In general, creditors are more interested in debt consolidation loans as process simplification and lower interest rates make chances of recovery significantly higher and risk lower. If you wish to alleviate your debt burden with debt consolidation loans, it is imperative to be aware of the basics.
Difference between debt settlement and debt consolidation
Debt consolidation loans typically do not cancel out our original debts. They only transfer the existing loans to a different lender and convert them to a different type. Debt settlement can be a viable option for those looking to completely rid themselves of their debts, either as a standalone measure or a debt consolidation loan.
Debt settlement reduces your obligation towards your lenders rather than simply reducing the number of lenders. If you are looking for debt relief, talking to credit counselling service providers or organizations that provide debt relief can be of assistance. They help you out by renegotiating your outstanding with the current creditors, often bringing down the outstanding amount or interest rates or both.
Impact on credit score
You can maintain lower interest payments by quickly paying off the principal portion of a debt consolidation loan. This not only translates to paying less but also bolsters your credit score down the road. The improvement in your credit score improves your chances of further finances.
On the other hand, credit scores typically favour longer and more consistent payment histories over an extended period. This means consolidation of multiple existing loans into a brand new one will have a negative effect on your credit score initially.
Also, the total amount of credit available reduces by opening a single new credit account and closing older ones. This raises the ratio of your debt to credit utilization.
Outlining the main advantages
If you end up with a large monthly payment towards multiple debts with high-interest rates, consolidating your disparate debts into one can be a great option. Not only do you end up with a lower interest rate, but you also have the benefit of process simplification as there is one lender and only one scheduled payment to deal with.
If you can stick to the consolidated payment schedule, the number of calls and messages from debt collection agencies goes down significantly. Also, you stand the chance of achieving complete freedom from your debt, provided you do not take any additional ones.
A word of caution
You should always be careful when availing debt consolidation loans from private agencies. Initially, the lower interest rates can make it seem a lucrative proposition. But you need to pay close attention to the payment schedule as well.
Speaking to your credit card issuer may be a good place to start in this case. Comparing paying off debts at their current interest rates with the potential new debt consolidation loan will give you a clearer picture. This is important because if your payment schedule is longer, you will end up paying more even with a lower interest rate.
For school loans that have special provisions like rebates, interest rate discounts, and more, consolidating them can mean having to forego them. If you end up defaulting on consolidated school loans, you may end up with attached wages or garnished tax refunds.
And finally, debt consolidating agencies also charge sizeable monthly and initial fees. You need to account for them as a part of your overall expenses.
Alternatives to debt consolidation loans
If the cons of going through a debt consolidation agency throw you off, there are other options that you can avail of:
Student Loan Programs: The Canadian government may help you consolidate your federal, territorial, or provincial student loans. In certain provinces like New Brunswick, Newfoundland and Labrador, Ontario, and Saskatchewan, your loans will consolidate automatically. In the remaining provinces, private student loans taken from a bank can also be consolidated.
Home Equity Loans: Home equity loans, home equity line of credit (HELOCs), or even conventional mortgages can consolidate your debt.
Credit Cards: As discussed, if you can avail a credit card with little to no interest for a set period, you can use it to self-consolidate your different loans.
Debt consolidation can be a powerful tool to rid yourself of excess liabilities quickly and effectively. However, as with any financial endeavour, you should exercise caution and be discernible.
A good place to start will be to familiarize yourself with the concept, the workings, and the pitfalls of debt consolidation. That will give you the know-how to address your debts securely, seamlessly, and and in a timely manner.