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When someone realizes their debt is starting to get away from them, and they’re not able to pay it down as quickly as they’d like, a number of options come to mind automatically. One of these is the option of debt consolidation. But what is a consolidation, and how can it help you deal with your growing debt problems?

A debt consolidation is traditionally offered by the big banks, as well as a host of credit unions across the country. When you have a consolidation, you’re really taking on a new loan but one that is equal to most of the debt you already owe. For example, if I had $20,000 of debt owing to various lines of credit, credit cards and overdrafts I could approach my local bank and attempt to negotiate a $20,000 consolidation from them.

By having my local bank or credit union consolidate all of my debts under one new loan, I could use those new funds to pay off the debt I already have, leaving me with one monthly payment at, hopefully, a fair and easily-payable interest rate (say, %7 to 15%). This would allow me to rid myself of the arduous task of dealing with monthly minimum payments ($150 here and $250 there, for example) and help rebuild my Beacon Score and credit rating in the process.

There are, unfortunately, two big stumbling blocks to success with a consolidation loan:

1. You have to be able to obtain one. If you already have damaged credit, this could be quite difficult to do (with or without a co-signer such as a family member) and even if you do manage to negotiate one with a bank you could end up with an interest rate that is slightly more than you wanted.

2. You’re trading one type of debt for another. Once those consolidated debts are dealt with, you’re still sitting on the new loan, and it could be a large burden for you. The minimum monthly payment on the consolidation loan might be too much for you to handle if you ever lose your job or had other large expenses to deal with.

In addition to the two large issues facing those who take on consolidation loans is the human factor – this suggests that once they’ve dealt with all of their various types of credit (lines of credit, credit cards, etc), many folks don’t cancel the cards or the credit lines but start using them again. Then, before they know it, they have twice as much debt as they had before. And twice as big a headache!

What Is The Alternative To Debt Consolidation?

A superb consolidation loan alternative is a consumer proposal, as administered by a Licensed Insolvency Trustee. It’s not a loan, it carries no interest, it usually turns out to be only a percentage of what you might have owed on your various debts (for example, many people end up paying back only 30% of what they owe, with the rest being discharged once the proposal is successfully completed) and once the creditors have voted in a majority to accept a consumer proposal they cannot back out or rescind the proposal. They’re locked into it as much as you are.

It’s a win-win for you and your creditors. They get a defined amount of money back from you over a five year period and you know exactly what you’ll be paying each month, with no surprises. Best of all, you’re encouraged to pay down the proposal faster if you’re capable of doing so. I know many of the people we have helped use their yearly tax refund to pay down a chunk of their proposal amount and some have seen a five year proposal whittled down to just 2 or 3 years by doing so.

By all means, talk to your bank or credit union about a consolidation loan but don’t become frustrated if they turn you down or demand you obtain a co-signer or pay a much higher-rate of interest to obtain the loan. Then come talk to us about a consumer proposal. I think you’ll quickly see the benefits of such an arrangement.

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