Debt consolidation – All that you need to know

Debt consolidation involves combining all your unpaid debts into one big loan and paying it off altogether. Instead of paying various creditors at different times, you can write out one check and pay them all at once. This procedure also reduces errors that could have led to additional payments and fines.

The three primary types of debt consolidation are:

  1. Debt consolidation loans
  2. Debt settlement
  3. Debt management plans

You must remember that debt consolidation does not take place overnight. It’s a long process that assists you in getting out of your debts. If you smoothly manage the procedure, it can help you in many ways. This include:

  • Reducing your monthly bills
  • Reducing your interest rates
  • Guarding your credit rating
  • Assisting you in paying your debts quickly

Debt consolidation loans

A debt consolidation loan ensures that all your payments are made to one creditor instead of many payments to various lenders. These loans have a lower interest rate than the amount that needs to be paid, which makes it quicker to consolidate debt and decreases monthly bills. Different debt consolidation loans include student loans, personal loans, money transfers through credit cards, and home equity payments. It is a convenient way of putting together all your bills into one final bill. It is also helpful in keeping track of all the expenses you have incurred during a particular period. However, you may have to go through a longer payment period than expected. Despite this, you should still consider opting for this method if you have numerous loans piled up.

Debt settlement

Many companies provide debt settlement services. The first step is to stop their customers from paying their creditors. Instead, they ask them to transfer monthly payments into their company to deposit it into an escrow account. It takes approximately 36 months for the account to reach its target. When the company meets the target, it makes offers to the creditors directly. You must remember that the creditor is not obliged to agree with the company. Late fee payments may also pile up during this time, making the loan much larger than originally.

Debt management plans

Most financial advisors believe that debt management plans are the best form of debt consolidation. The most preferred debt management plans are carried out by non-profit organizations. They begin their credit counseling sessions to help you calculate the amount of money you can borrow from creditors. These agencies can also help you get a lower interest rate for your loans and waive the late fee payments to make your monthly expenses more affordable. The company will ask you for one bill, which will be divided and sent to your creditors individually. Although opting for a debt management plan affects your credit score, after three to five years, all your loans will be paid off, which will improve your credit score.

You should always be careful before making any decision to consolidate your debt. Choose a particular type of consolidation wisely depending on your debt and creditors.

Importance of debt consolidation in Canada

saraMost Canadians usually turn to credit counsellors for advice when they are heavily in debt and are overwhelmed by the repayment. It certainly is a good idea to turn to a professional credit counsellors when you don’t know what to do about your situation, they have a lot of understanding on financial matters and will be able to offer you helpful advice.

When you visit credit counsellors, they will first of all advice you on how to reduce your spending and expenditure so as not to get into further debt and then they will recommend a debt repayment plan for you based on the amount of debt you owe and your monthly income. One of the recommendations they usually make is taking a debt consolidation loan. This is a tried and tested way of getting out of heavy debt and that’s why the professional experts may be quick to recommend it above other options.

A debt consolidation loan is a large loan that is taken to offset smaller loans. The smaller loans include the debts on your credit card and those from a car or any major household asset. The debt consolidation loan allows you to offset all the loans at once and then remain with only one monthly repayment of the large loan as opposed to smaller loans.

When resorting to debt consolidation as a way of clearing your heavy debts, it is important to first consider your credit rating and make sure it is acceptable. Most financial institutions are unwilling to offer debt consolidation loans to customers with poor credit score as they fear they may fail to repay the loan. You can however still manage to get a consolidation loan with a poor credit score with the help of an asset such as a house or any other major investment, these serve as security in case you are unable to repay the loan. Many financial institutions in Canada can also offer you a debt consolidation loan in spite of a poor credit score if you have a guarantor with a good financial standing.

There are various benefits of debt consolidation. The first and most important of them all is reduced interest on loan. The large loan that is used to offset the smaller loans has a much lower monthly interest rate than the smaller loans. Larger loans generally have lower interest rates than smaller loans since their repayment is spread over a long period of time. You will therefore benefit from a reduced interest rate and be able to save some money when you take a debt consolidation loan.

Secondly, debt consolidation loan offers you reprieve from the stressful task of repaying many small debts every month and from the agony of creditors who may be following up after you every month. When you take a debt consolidation loan, your financial institution will repay all your creditors at once thereby making sure that no creditor comes after you seeking repayment again. You also will not have to be making repayment for many smaller loans every month and will only have one loan to concentrate on. All these will offer you peace of mind.

Thirdly, debt consolidation enables you to improve your credit rating. Your credit will improve because of the prompt and timely repayment of the smaller loans. With an improved credit score, you will be able to easily secure loans in future.

Lastly, debt consolidation allows you to get out of debt quickly. It is easier to get out of debt when you have only one loan to repay at the end of the month as opposed to when you have several loans to repay. You can easily plan your finances to enable you offset the single loan.