When you’re struggling to pay off your total debts, it’s easy to feel like you’ll never get control over your finances. The good news is that there are a number of ways to get out of debt—and you don’t have to do it alone.
Debt consolidation loan is a lifesaver when you’re treading water just to keep your head above your loans. By reducing multiple payments at multiple rates and multiple creditors into one lower monthly payment, consolidated debts quickly become more manageable. That’s why an increasing number of Canadians choose debt consolidation.
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What exactly is debt consolidation?
Debt consolidation involves using separate financing from a specialized lender to pay off several small loans. Ideally, this loan will have a lower interest rate than the debts it replaces, which means you’ll consequently pay less in total interest over the life of the loan.
Many consumers are afraid that consolidating their debts will damage their credit scores. However, there is no evidence that consolidating debts hurts scores, as long as consumers make all of their payments on time.
However, you need to shop around for the best rates and terms before signing on to a consolidation loan. Individuals who consolidate their debts should also keep an eye on their credit reports. This can help them avoid any errors that could negatively affect their scores.
Importance of debt consolidation
Not only can debt be stressful, but it’s also often difficult to manage, especially when you have multiple creditors to pay. However, here is how debt consolidation can help you out.
One of the most significant benefits of debt consolidation is that it can simplify your finances. Rather than making multiple payments with different interest rates each month, you’ll only have one bill to pay. This means no more worrying about which payments are due when and which creditor gets paid first.
Reduced interest rates
Another significant advantage of debt consolidation is that you may end up paying less interest on your debts. With many types of debt consolidation, your new, consolidated loan will have a lower interest rate than you previously paid. This means, ultimately, you may end up paying less overall and get out of debt faster!
Steps on how to consolidate your debt
You can take control and get a grip on all overdue payments with a simple debt consolidation plan. It’s not as challenging or burdening as you might think —you just need to follow these easy steps, and you’ll be on the path to taking back control of your life.
1. Take notice of the complete debt amount
It’s important to know what you’re dealing with before jumping into things. The first step is to add up the total debt you owe, including credit card balances, student loans, and other debts.
2. Interest rates matter
What’s the average interest rate on the debts you’re trying to consolidate? This is important because it will determine how much interest you will pay throughout the life of the loan, which will affect the amount of money you have to pay each month toward that loan.
3. Fix the monthly payable amount
You should also figure out what kind (amount) of monthly payment would fit into your budget before deciding on any type of consolidation plan or taking out a loan from another lender or bank.
4. Lookout for consolidation alternatives
You must look for the best alternatives when it comes to consolidating your loans. Browse for the best interest rates and get in touch with mortgage brokers. These experienced professionals can help you connect with the best lenders depending on your credit score, debt to income ratio and other financial components. Generally, secured asset loans and good credit scores are helpful to qualify for low-interest rates.
Types of debt consolidation
You can find different types of debt consolidation in the market:
- Fixed interest consolidation loan: In this debt consolidation method, you can take fixed low-interest loans to pay out/foreclose the smaller high-interest debts. A high credit score can be helpful in such cases.
- Credit card balance transfer with minimal or low interest: In this type, you can opt for a new credit card with low or introductory 0% interest to transfer the existing debt balance. You’ll need to make a single payment at a low-interest rate. Ensure to understand the transfer fees, deadlines and missed payment consequences before securing the card.
- Secured loan through a home equity loan: In this loan, the mortgage lenders offer you a substantial loan based on your home’s equity value (current market value-loans on your home). The interest rates are low since the loan is secured with an asset (your home).
Factors to consider before looking for debt consolidation
If you are one of the millions of Canadians struggling to pay off your credit card debt, it’s time to make a plan. Before you think about climbing out of debt, you need to know whether or not you should consolidate your debt. Several factors tell you when debt consolidation is a good idea:
- A promised income capability
- The ability to secure reduced interest rates
- When you are pretty sure about the capacity to take up monthly repayments
- If you are confident about the repayment route and schedule you to opt
If these conditions apply to your financial situation, consolidating your debt could be a good option.
Thus, debt consolidation is the process of taking all your debt and combining it into one single monthly payment. It’s generally at a lower interest rate than what you were paying before, which means your debt will be paid off faster and for less money.
All you have to do is consistently pay your debt as normal, and you won’t incur any additional fees or charges. By following through with debt consolidation, you are already taking steps towards taking charge of your finances.