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:
- Credit card debt balances to pay, including retail store credit cards
- Other high interest consumer debt, such as a car loan from a finance company
- Multiple obligations with varying due dates, such as insurance payments, child support, student loan payments, etc.
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:
- A regular income stream
- A reasonable level of monthly expenses
- An acceptable credit rating
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:
- A lower overall interest rate on all your debt, which lowers your monthly payment and total interest and makes it possible to pay your debt off sooner
- Simplifying the management of your debt with a single monthly payment
- You can keep your credit cards as a back-up in emergencies
- Your stress is reduced if you can make the required payments on time
- Your credit rating should not be affected (unless you are turned down for the loan)
- You can use your assets (e.g., your home) to reduce your interest rate further
DRAWBACKS OF DEBT CONSOLIDATIONS LOANS
Certain disadvantages come with debt consolidation loans, including:
- You must pay the debt in full;
- You will pay more interest over the long term;
- You will still have access to your credit cards, which could cause you further debt;
- You must be disciplined about making payments (or you could lose your collateral on a secured loan)
- You could damage your credit or the credit or a co-signer if you are unable to pay
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.