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Debt Consolidation is the result of combining all debts into one single new loan, with one monthly payment. It allows you to get a lower interest rate on all your debt combined, because you are buying a debt service plan in bulk and therefore you should be able to achieve a lower interest rate than through your individual loans.
When Would Debt Consolidation Be a Practical Option?
Credit card debt is one of the most common reasons why people use debt consolidation, since credit cards have much higher interest rates than even an unsecured loan from a bank. Debt consolidation is an optional debt solution plan if you have:
Where Can You Get a Debt Consolidation Loan?
A bank or other financial institution may provide you with a debt consolidation loan that is secured or unsecured. If you secure the loan with existing assets (such as your home), then you should be able to obtain a lower interest rate because you are seen as a less risky investment and can always foreclose the home if you do not pay the loan.
Qualifying for a Debt Consolidation Loan
To qualify for a debt consolidation loan, you need to have:
Your payment history and credit score will be reviewed by the underwriters to assess your default risk before deciding whether to offer you the loan. If you can offer security or a co-signer, then the bank may be more willing to offer you a loan. Finding a co-signer is difficult as it makes this person’s credit vulnerable to damage.
BENEFITS OF DEBT CONSOLIDATION
There are several advantages to consolidating your debt, including:
DRAWBACKS OF DEBT CONSOLIDATIONS LOANS
Certain disadvantages come with debt consolidation loans, including:
Other debt solutions, such as a consumer proposal, will forgive some of your debt and allow you to pay less in total. If your interest rate is variable or it goes up at renewal, your debt could become unmanageable and you could be in a position where you end up needing to find another debt solution.