Debt consolidation loans have ads everywhere, but do they really work? How can a debt consolidation loan help someone who is struggling financially with debt if it is just another type of loan? What makes a debt consolidation loan better than other loans?
What is Debt Consolidation?
Debt consolidation is a process with which you can combine all existing unsecured debt you have under one monthly payment. This means that under debt consolidation, you can combine your payday loans, credit card debt, and other high-interest personal loans. Debt consolidation is typically done by borrowing money from a private lender or a bank, seeking debt relief via a Consumer Proposal to your creditors, or taking on a Debt Management Program.
What is a Debt Consolidation Loan?
A debt consolidation loan is a loan obtained to pay for the combined balances of various debts. By going this route, the borrower can save a significant amount on interest rates and have an easier time managing debt because there is only 1 bill to take care of.
Is it Easy to Get a Debt Consolidation Loan?
Although getting a bank loan is a very popular way of obtaining a debt consolidation loan, it is not easy to qualify for and usually come with a variety of rules and limitations. For borrowers who’ve already received a collection call or missed a payment, it is often already too late to apply for a debt consolidation loan from a bank. Banks require a steady income, a spotless credit history, and a good size of home equity or a co-signer.
Note that for those who can get a debt consolidation loan using their home equity, missing payments could mean losing their home and getting further into debt. For those who had a co-signer, failing to pay could mean placing the co-signer in huge debt.
Expectations About Ways to Consolidate Debt
There are many ways to manage debt consolidation depending on which of the following you chose to handle it with:
If you borrowed money from a private lender, know that interest rates will still be on the high side more so if you will consider the fees. Interest can be as high as 30% and failure to pay on time can mean huge losses on your part.
Debt Management Program
If you used a Debt Management Program, you will have to adhere to the terms negotiated by the councilors with your lender although the terms are not legally binding. This also means that you have enough money saved up to pay for your necessities, otherwise, you won’t be able to afford the program.
If you cannot pay your unsecured debts on time and owe less than a quarter-million in unsecured debt (without adding your mortgage debt), then you may qualify for a Consumer Proposal. For those who owe more than $250,000, a Division 1 Proposal is what you may qualify for. A Consumer Proposal will benefit you greatly if the majority of your unsecured debts’ creditors accept it because everyone that you owe money from will have to accept the Proposal, reduce the amount of your debt to what you can afford, cover all unsecured debt in less than or equal to 5 years, give you a chance to fix your life, and stop all legal collection actions by the creditors of your unsecured loans. Lenders accept a Consumer Proposal because it allows them to get paid more as compared to when a person files for bankruptcy instead.
To know more about debt consolidations loans and how they can help you, contact us here at Homebase Mortgages. We’ll be happy to discuss which one is the best for you according to your specific circumstances.