When you have multiple debts due to different creditors or lenders, you might wish that instead of trying to juggle and schedule multiple payments that you could just have all your debt rolled into one debt and have a single payment. Luckily for you, this concept of rolling all your debt into one single payment is called debt consolidation.
Debt consolidation can sometimes be also known as debt restructuring and it simplifies your debt repayment from multiple payments to different entities, into one singular payment. But you may be wondering if debt consolidation is a good idea for you, there are a few facts that you should take into consideration first.
What is debt consolidation?
Debt consolidation loans are usually used to pay off your debts from different sources like credit cards, credit lines, overdraft balances, and higher-interest loans like payday loans.
Let’s say you have multiple loans, all with different amounts owing and different interest rates. When you choose to consolidate your debts, you essentially take out a debt consolidation loan that encompasses the total sum of all your debts combined and pays them off. Now instead of having to juggle multiple payments and different interest rates, you now only have a singular payment with one interest rate. So, you only have one monthly payment for the loan itself.
In combination with simplifying your finances, debt consolidation usually gives the borrower more favourable loan terms, such as longer to pay or more competitive interest rates.
Is debt consolidation different from consumer proposals?
Yes, debt consolidation is different from debt settlements or consumer proposals.
When you consolidate your debt, you’ll be applying for a consolidation loan through a lender like a bank, credit union, or other kind of financial institution. The lender of your choice will review your credit application, taking into account things such as your credit score, income and whether a new loan will be secured with or without some kind of assets or collateral. After reviewing, the lender can decide whether they’ll approve your application.
On the other hand, debt settlement refers to the process of creating a formal offer known as a consumer proposal. This would let you settle your debt with your lenders by reducing the amount owed and offer partial repayment at no interest through a trustee in bankruptcy. Although there are some differences between a consumer proposal and bankruptcy, both will still negatively impact your credit score.
What are the benefits of consolidation?
Debt is a lot more common than most people think, and often restricts people from doing what they want. Debt consolidation can seem like a golden solution to many in certain situations, but there can be some drawbacks.
Some of the benefits of debt consolidation include:
- One simple, singular monthly bill
- Smaller overall payments
- A lower interest rate which means more of your payment goes toward the principle
Now we have to also acknowledge the opposite side of the spectrum where the drawbacks can be.
When debt consolidation isn’t worth it
Consolidation won’t address what created the initial debt in the first place, it can’t curb or cureexcessive spending habits. So if you are looking for a band-aid solution to your debt, consolidating your loans will not help.
Also if your debt is small and you could potentially pay it off within 6 months to a year at your current pace, debt consolidation may not be the best solution for you. Since the consolidation would only negligent a small amount by consolidating.
Do debt consolidation loans hurt your credit?
This is a common question and concern many people have that can cause hesitation. If you are wondering if debt consolidation will affect your credit, you’re right it will. But, in a good way! Debt consolidation can help your credit if you make on-time payments as consolidating will shrink your credit card balances. Your credit will be negatively affected if you run up credit card balances, close all or some of your remaining cards, or if you miss a payment o your debt consolidation loan.As long as you make your payments in full and on-time, your credit should actually see a little boost!
How do I star consolidating my debt?
The first step in consolidating your debt is to talk to a certified debt counsellor to explore all your options and find the best debt solution for you. Debt consolidation can be tricky to do by yourself, and if done incorrectly you won’t see any of the usual benefits. The best way to manage your debt is to get advice and guidance from a professional who has extensive experience with helping individuals repay their debt and make strides towards financial freedom.