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Would A Debt Consolidation Loan Work For Me

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Debt Consolidation Loan Details

It can feel hopeless to be overwhelmed by debt. When bills keep coming and debt keeps piling up, it’s often tough to know what to do. One option that many people look to is getting a consolidation loan.

In some situations, a debt consolidation loan can help simplify debt repayment and potentially save money on interest.

When you get a debt consolidation loan, you either:

  • Use one of your existing debts to pay off many of your other debts. For instance, you may use one credit card to pay off several other cards.
  • Get a new loan and use this loan to pay your existing debts.

Whichever method you choose, the reasons for getting a debt consolidation loan are the same. When you get a consolidation loan, you aim to:

  • Simplify the debt repayment process. Many people owe various debts to various different lenders. These debts are often due at different times and for different amounts. As a result, people frequently miss payments, pay the wrong amounts, or generally have trouble keeping track of and paying the debt. A consolidation loan leaves you with only one monthly payment to make.
  • A consolidation loan can save money in some instances. For example, if you manage to get a loan with a lower interest rate than the overall rate on the debts you’re paying off with the loan, you’ll save interest costs.

While a consolidation loan can be a good option for some people, it’s important to know that no two debt situations are the same. Every financial situation is unique, so there is no “one size fits all” solution for everyone.

It’s important to look at all aspects of the debt consolidation process, weigh the positives against the potential negatives, look at the other options, and use this information to determine if a debt consolidation loan is a right choice for you.

Possible Consolidation Loan Positives

One of the main positives to getting a consolidation loan is that it makes it easier to repay your debt. It’s easy to forget to make a payment or pay the wrong amount when you have many debts. Unfortunately, if this happens, you could be hurting yourself financially.

Most lenders charge penalties for missed payments and these can be quite significant. In addition, missing a bill payment also hurts your credit score. A credit score is important because lenders use this information to determine whether they’ll give a person a loan. If you have a poor credit score, the lender may not be willing to give you a loan and, if they are, they will likely charge you a higher interest rate.

Getting a debt consolidation loan makes the process of paying off debt easier by giving you a single payment to make each month rather than several payments all due at different times.

A consolidation loan can potentially save you money as well. This is true if you are able to get a loan that has a lower interest rate than the overall interest you are paying on your existing debts. For example, if you currently owe money on three credit cards and those cards charge 20%, 17%, and 16% interest, and you are able to get a consolidation loan with a 15% interest rate, you will save money. This will make it easier to pay off your debts as you won’t have to spend as much on interest.

Possible Consolidation Loan Negatives

While a debt consolidation loan can possibly save you money on interest charges, whether or not it does depends on if you can get a loan with a low enough interest rate. This can sometimes be a problem. It can often be quite difficult to find a loan with a low enough rate of interest for it to save you much money. This is especially true in situations where a person does not have a very good credit rating.

If you have borrowed more money than you can afford to repay or if you have missed debt payments, you may have already done damage to your credit rating. That can make it very difficult to save money with a debt consolidation loan. Lenders often aren’t willing to give people with poor credit or who have a lot of debt a loan with a low-interest rate.

Also, it’s important to remember that getting a consolidation loan also doesn’t solve the underlying debt issues. For instance, if you owe money on three credit cards, then take out a new loan to pay off these cards, there is nothing to stop you from continuing to use the cards and build up new debt before you’ve paid off the old debt. This can be a problem since, if you took out a separate consolidation loan, you now have additional capacity to borrow that you didn’t have before. It can be very tempting to continue to overspend and that will put you in an even deeper financial hole.

It’s also important to note that getting a consolidation loan does not reduce the amount that you owe. While a debt consolidation loan can possibly save you money in interest, you will still need to pay the full amount owing. If you have borrowed more than you can afford to repay, consolidating your debt doesn’t change that fact. You still owe more than you can reasonably afford.

When Does a Consolidation Loan Work?

As mentioned, each financial situation is unique. This means that there are some circumstances where getting a debt consolidation loan can be a good idea and other instances where it may not be the best choice.

In general, a consolidation loan can be helpful if you are in a situation where you hold debt that has a very high-interest rate and where you are in a position to get a loan with a significantly lower interest rate. For that to be the case, you likely need to have a good credit rating. If that is the situation that you are in, then consolidating your debt could be a good option. However, even in this situation, you will only potentially save money on interest payments. You will not have the overall amount you owe reduced.

Is a debt consolidation loan the right choice? Consolidating your debt will usually be the most helpful if you are able to pay the debt you owe, but the interest rate is preventing you from making your payments.

Consolidation Loan Alternatives

If you are having trouble paying your debts, there are many available options. As mentioned, each financial situation is unique and there is no one option that is perfect for everyone. However, it’s important to truly review all options before you decide.

Meeting with a Licensed Insolvency Trustee can be a good idea. A trustee is a person who has received specific training and who is licensed by the federal Office of the Superintendent of Bankruptcy. When you meet with a trustee, they will review your situation and provide you with details on the options that may be available to you. Trustees are required by law to provide information on all possible options, including those that they do not administrate. This means you will be given a full picture of all available solutions and you will then be able to make the right choice for your financial future.

Alternatives to a consolidation loan include:

  • Consumer Proposal
    • A consumer proposal is a legal process. Unlike a consolidation loan, the consumer proposal process works by offering your unsecured creditors a proposal for how much you can afford to repay. This is usually for an amount that is lower than the overall debt you owe.
    • If the creditors that are owed the majority of the debt accept the proposal, then all of your unsecured creditors are bound by its terms. For example, if you owe $40,000 in debt and the creditor (or group of creditors) that is owed at least $20,000 decides to accept the proposal, then it becomes binding.
    • A consumer proposal allows you to pay a portion of what you owe and the remaining outstanding debt is eliminated once the proposal is complete.
    • If the proposal is accepted, you are responsible for making monthly payments to the trustee who will distribute them to your creditors. This means that, like a consolidation loan, you will only need to make g a single payment each month rather than making separate payments to each of your creditors.
    • A consumer proposal also provides legal protection. Once you file, your creditors are not able to contact you and they cannot take any action against you to collect the debts.
  • Bankruptcy
    • Bankruptcy is often the last option considered, but it can be the right choice depending on your financial situation.
    • In bankruptcy, a person’s debts are eliminated and they are able to start their financial life over.
    • You also receive legal protection from creditors when you file for bankruptcy. The trustee becomes responsible for all communication with your creditors. Creditors cannot take collection action against you and any actions that are in place must be stopped.

As mentioned, each financial situation is unique and there is no “one size fits all” option that applies to every person in every situation. In some cases, a debt consolidation loan can be a good idea, while other options may be preferable in other instances. Speaking with a Licensed Insolvency Trustee can help you understand the different options and make the right decision for your financial future. It is always your decision as to how you wish to proceed.

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