Your Guide to Debt Consolidation Loans 

What is a Debt Consolidation Loan and How Does It Work?

In basic terms, debt consolidation offers financial debt help by paying off several debts with one large single amount.

The Office of Consumer Affairs (DCA) in Canada defines a debt consolidation loan as a loan, originating from a financial institution or bank, that allows a borrower to repay his or debts to one lender instead of several creditors. In turn, the borrower only has to pay one convenient monthly payment, frequently at a reduced interest rate. A borrower finds the best way to pay off credit cards or small loans faster and more conveniently by taking this approach.

The process raises a lot of questions for Canadians. For example, many people want to know if debt consolidation loans damage credit scores or if some types of funding may end up being a scam. So let’s find out more about the nature of this loan.

How the Debt Consolidation Process Works

By applying for a consolidation loan, you ask a lender for a lump sum to get rid of any nagging high-interest monthly bills. If you apply for a debt consolidation loan, you can save thousands of dollars in interest in only a few years.

Who Benefits Most from Debt Consolidation?

Maybe you are drowning rather than swimming in debt. If this is the case for you, you may need to seek debt consolidation services, such as debt settlement or debt restructuring. According to the Canadian government, debt consolidation is often advised as a debt management solution to cover debts for credit cards, consumer loans, or public utilities. However, not all debts can be combined into a debt consolidation package. A mortgage is an excellent example of this type of financing. To pare down the interest on a mortgage, you need to refinance the loan. 

However, you can still use your house to increase your leverage with creditors. In this case, you might borrow against the equity in your cabin (through a home equity loan) to pay off credit card debts or similar expenses. Nevertheless, you still need to heed the warning: Unsecured debt consolidation loans are better solutions, as you can lose your house if you default on a secured loan.

Therefore, it is better to focus on unsecured debt consolidation loans with higher interest rates but are not tied to an asset, such as a house or car.

Avoid the Temptation of Lightly Using Credit

People who use consolidation loans for bad credit may still feel tempted to use their credit cards. If you use your credit cards, you need to do so to cover emergencies. You cannot use them for frivolous expenses, such as clothes shopping or entertainment. Otherwise, you will fall back in those murky waters that keep you from getting financially ahead. 

Also, be aware that your debt solutions lender will expect prompt repayment of the loan amount each month. If you had a hard time or found it difficult to get out of debt in the past, you may still have problems with paying the consolidated loan amount.

If you are one of those borrowers who need bad credit debt help, you may have to obtain a co-signer to get approved for one of the unsecured debt consolidation loans online. While a co-signer will cover repayment if you get behind and face default, you may not want to risk a friendship if you seek this type of help from someone close to you. A co-signer must have a good payment history and an excellent credit score to back a loan. This can assist you greatly in getting approved for consolidation loans for bad credit.

Other Options for Consolidating Debt

The Difference Between Debt Consolidation and Debt Settlement

While debt settlement and debt consolidation both provide getting out of debt help, they use different methods to achieve the goal.

Debt settlement involves negotiating with creditors to settle any debt for less than what is owed. If you find your debts too hard to manage and don’t want to file bankruptcy, debt settlement offers the best solution if you need help with credit debt or assistance to get out of debt with a single creditor.

Debt settlement often provides debt solutions for unmanageable debt. You or a negotiator who works for you offers creditor terms to settle a debt for less than the owed amount during the process. For example, if you owe $5,000, you may provide a lump-sum payment of half that amount or $2,500. If the creditor accepts the offer, the debt is considered settled. 

If you are behind with several creditors, you will have to negotiate with each creditor to settle. You could be increasing your debt load with late fees and penalties during this time. Unlike debt consolidation, most financial advisors recommend debt settlement as a last resort, as this debt management solution will still not raise your credit score. You will still have missed payments and a settlement is considered a negative item on a credit report. 

Also, a debt settlement company assesses a fee for its services – typically a percentage of the owed amount. This charge may run as much as 25% of the final settlement. 

Credit Card Advances

While you can take out a credit card advance on your credit card to consolidate some of your debt, you still will remain in debt, as the credit card interest is usually too high to keep you above water financially. Typically, it is better to opt for a debt consolidation loan for paying off debt, as you will incur a lower interest rate.

How to Get a Debt Consolidation Loan

To obtain a debt consolidation loan, you need to provide your contact details, including proof of income and identity. You also need to share your source of income and give information on how much you owe. Typically, it is easier to get a debt consolidation loan online if you have a regular source of income and at least a fair credit rating. You should also be at least 18 years old.

Final Thoughts

The main reason to use a debt consolidation loan for getting out of debt involves the interest charged. Most credit card debt consolidation loans offer a lower interest rate than what you pay when using credit cards. 

Just make sure you are not tempted to use your credit cards for anything but emergencies. If you want to take control of your debt, you have to be careful about how you use your cards. Other debts, such as retail store accounts, utility payments, and other commercial charges, can also be eliminated by choosing a debt consolidation solution.