Using a loan to consolidate debt can be tricky because the last thing you want is to get a loan that will get you deeper in debt. What you want is to find the best loan option for consolidating debt that will perfectly suit your situation. This is possible after careful consideration of the pros and cons of each. This blog is an overview of the debt consolidation options in Canada.
Consolidate with a Debt Consolidation Loan
A debt consolidation loan is when you borrow from a finance company, bank, credit union, or lender that will provide you with funds to pay off existing loans and in effect bringing together all your debts into just 1 loan. This requires a good credit score and often requires collateral but interest rates are lower than traditional loans and will allow you to pay off your debt in 3 to 5 years.
Consolidate Debt with Debt Settlement
Debt Settlement means having an agreement with your creditors that allows you to settle your debt by paying a large sum of cash with a lower value compared to your loan. This entails contacting your creditor and offering to pay 50-80% of your debt in cash in exchange for them marking your loan as fully paid. This can either repair or damage your credit score depending on the process you followed.
Consolidate Debt Using Overdraft or a Line of Credit
You may apply for a line of credit or an overdraft from a bank to help you with consolidating debt. They usually require a good credit score, positive net worth, and a verifiable source of income but those that come with collateral may be easier to qualify for.
Consolidate Using a Debt Management Program
You can consolidate all your credit card debts into one with just 1 monthly payment via a DMP or a Debt Management Program. A downside is that this includes counselling which may put off some people but the average time people pay off this loan is just 3 years, largely because their debt counsellor really encourage them to stay on top of payments. Your creditor must approve before you can use a DMP.
Consolidate Debts with Credit Cards
It is possible to consolidate debts with credit cards such as in the case of transferring multiple credit card debts to another credit card with a lower interest rate. A disadvantage is the transfer fee but if you have lots of debts, you can also save a lot on interest over time.
Consolidate Debts Using a Home Equity Loan, a Second Mortgage or a Home Refinance
Consolidating debts using a Home Refinance, a Second Mortgage, or a Home Equity Loan all mean that a financial institution, a bank, or a private lender will lend you money by using your home equity as collateral. These loans are easier to qualify for because they are secured by your home’s value. If you’re careful, you won’t end up going through the most profound disadvantage which is possibly losing your home. Fortunately, these types of debt consolidation loans come with terms that also protect the borrower and some lenders have very friendly payment terms especially when negotiated by mortgage professionals.