Is debt consolidation a good idea? Are you thinking of consolidating your debts or looking for an answer to your debt problems? Learn about the factors to consider when determining the best solution.
Are you having trouble meeting your financial obligations, whether it’s paying off your loans or paying your bills? If only there was a way to put it all together in one loan … well, it’s possible! This is debt consolidation – sometimes also called “debt restructuring” – a tool that can simplify paying off your debts. But what is the procedure to consolidate your debts? And is this a good idea given your situation?
The answer to this last question is simple: it depends. Here are the factors to consider when weighing the pros and cons of debt consolidation. This will allow you to determine better if this tool can meet your needs.
What is debt consolidation?
Debt consolidation loans are usually used to pay off debts accumulated on credit cards, lines of credit, overdrafts, and loans with high-interest rates, such as payday loans. Here is how it works: a person who is late in repaying loans or paying bills takes out a new loan to settle all of their arrears. The funds from this new loan are therefore used to repay all unsecured credit accounts. Often, this loan carries a lower interest rate than all or most of the other credit products.
What is the difference between debt consolidation and debt settlement?
Debt consolidation differs from debt settlement and the consumer proposition.
It involves applying for a consolidation loan from a lender such as a bank, a credit union, or any other financial institution. The lender will then assess your credit request based on factors such as your credit rating., your income, and the offer of a property to guarantee the repayment of the loan. He will decide whether to approve your loan and determine the interest rate you will have to pay based on the information in your application. If you meet the deadlines for all of your payments, your debt consolidation loan should not negatively affect your credit rating. On the contrary, it could even improve it.
Debt settlement consists of presenting to its creditors a formal offer called a “consumer proposal.” This mechanism makes it possible to settle claims against its lenders by reducing the amount due and by offering them a partial interest-free reimbursement through a bankruptcy trustee. A consumer proposal is an alternative to bankruptcy, but both have a significant negative impact on the credit score.
The Pros and Cons of Debt Consolidation
Canadians who find themselves in a debt spiral are more likely than you think. According to Manulife Bank’s 2018 debt survey, more than half of Canadians believe their debts prevent them from doing what they want, including saving for retirement. When you feel overwhelmed by your debts, consolidation can seem attractive.
In fact, debt consolidation has both advantages and disadvantages. Here are some benefits:
Only one payment must be made each month.
Overall, the payments are lower.
Thanks to the lower interest rate, a more significant portion of your payments are allocated to capital.
But debt consolidation also has disadvantages. It could cause you problems in the following situations:
If the lender deposits the funds from your consolidation loan directly into your account, you may be tempted to spend them for purposes other than paying off your debts.
If you fail to close an unbound credit product after paying it off, you could give in to debt sirens despite the consolidation loan you just took out.
The consolidated payment that you make each month could serve as a pretext to maintain your bad financial habits. Consolidation loans would then become the universal remedy for excessive use of your cards and lines of credit.
Is debt consolidation an adequate solution to your debt problems?
If you find yourself falling into a sea of debt and monthly payments, debt consolidation can be a lifeline. It can help you simplify your finances by allowing you to make a single lower monthly payment, which will fit more readily into your monthly budget.
However, for these benefits to materialize, your loan application must be accepted, and you must be eligible for an interest rate lower than those applicable to your unconsolidated debts. It is also essential to think about it twice before using debt consolidation as an expedient for bad financial habits. Some people give in to the temptation to apply for new credit after consolidating debts and then apply for a new consolidation loan when they start to accumulate arrears. Anyone undertaking to consolidate their debts should have the firm will to control their debt in the future.
Debt management; there are many ways to get out of it.
Many people believe that when their debt level soars and gets out of control, they have only one option: bankruptcy. However, depending on your financial situation, there are other ways to manage your debt that are available to you. There are strategies for getting out of debt that you could even practice on your own, with discipline. Of course, with the vast number of choices that you need to consider, it can be challenging to choose the best route taking into account your circumstances. Make an appointment with a Grant Thornton debt professional to learn more about your options and to work out the best way to reach your goals.
Control your debt by yourself
Prepare a budget
If you are not confident that you are fully aware of your financial situation, you should start by preparing a budget. You must then follow it to manage your monthly expenses. Make sure to include a line in your budget for savings and debt repayments.
If you have multiple debts and they have high-interest rates, one way to make your life easier and save is to consolidate your debts. Combine and pay off many of your mortgages and loans with a single payment with a lower interest rate. Often a consolidation loan is a line of credit.
Informal debt arrangement
You have the option of presenting your creditors with a plan outlining how they will be repaid. Creditors will often negotiate since their goal is to get the money you owe them. Explain your financial situation honestly and submit a realistic plan and schedule for repayment.
Formal debt control
There are many credit counseling agencies, and they can help you manage your money as well as your debt. They can also help you create a budget. However, note that a credit counselor is unable to provide the same range of services as a Grant Thornton trustee. For example, consumer proposals and bankruptcies are not services that credit counselors can offer.
Debt management plan
A debt management plan is an agreement between you and your creditors. The purpose of this agreement is to reduce your payments. Note that a debt management plan does not offer the same benefits as a consumer proposal, and you will have to repay all of your obligations.
Methodical payment of debts
The orderly payment of debts is also known as the “merger order” program. In this scenario, the court will consolidate all of your debts into one and determine what you will have to pay to the court periodically. Upon receipt of payments, the court will reimburse your creditors on your behalf as well as the interest that is due. This option is available only from government approved establishments and is not available in all provinces.
For help about debt consolidation or payday loan debt help you can visit online.