Debt consolidation is the combining of many debts into one by taking out a loan to pay off many debts. It does not reduce the debt, but may be less stressful and more affordable to consolidate debt into one monthly payment rather than juggle several debt payments.
Debt consolidation will also reduce the overall payment and save on interest if the interest rate on the consolidation loan is lower than the average interest rate on the existing debts. For example, the annual interest rate on credit cards is usually more than 19.99%, whereas a consolidation loan may be as low as 5% interest.
If a person owes a lot of high-interest debt, credit consolidation options might be helpful. Those looking for financial debt help often find that high-interest rates make it difficult to repay debt. By lowering the amount of interest that you are responsible for paying, your payments might become more manageable.
Why consolidate loans? The motivating factors behind debt consolidation should be to:
simplify life and reduce stress;
save on interest charges; and
pay the debt off as soon as possible.
If you are confused about the usage of the term credit consolidation vs debt consolidation, know that, in most cases, these terms are used interchangeably to refer to the same thing.
The Different Between Secured and Unsecured Debt Consolidation Loans
A consolidation loan may be secured or unsecured. The interest charges are usually lower when the loan is secured.
A loan is secured when the borrower is required to use an asset as collateral for the loan. This means that the lender may sell the asset to pay the debt if the borrower defaults on the loan. Some examples of secured loans are collateral mortgages and home equity lines of credit (HLOCs), which are secured against real property. Debt consolidation mortgage options are available. When using a house as collateral, the debt may be consolidated by refinancing the existing first mortgage, obtaining a second mortgage, or obtaining a home equity line of credit (HLOC) to pay off the debts. Refinancing, second mortgages and HLOCs are the most common means of consolidating debt in Canada for those who own a home.
Unsecured debt consolidation loans in Canada often charge higher rates since there is no asset used as collateral.
A loan is unsecured when the borrower is not required to use any assets as collateral for the loan. An example of an unsecured loan is a personal loan or an unsecured line of credit (LOC), where no assets are used as collateral.
Credit Consolidation and Other Debt Relief Options
Credit consolidation loans are not the only debt relief options available. Those looking for debt relief in Canada will want to consider their own personal financial situation when choosing between credit consolidation loans and other options.
If you are in a situation where you could repay your debt if the interest rate was lower, then choosing to consolidate could be a good option for you. However, if even making the payments without any interest would still be difficult, then you may wish to choose another path towards becoming debt free. After all, the reason why you would choose to consolidate loans is to make it easier and more affordable to repay your debt. If consolidating your debt doesn’t do this, it could be a good idea to choose another option.
In addition, if you have a poor credit score, it can be tough to get a consolidation loan with a low enough interest rate to help your situation. This is especially true when it comes to unsecured debt consolidation loans in Canada, as these often have higher interest rates. While consolidating your debt can make it easier to make your payments (since you’ll only have one payment instead of many) it doesn’t actually reduce the amount that you are expected to pay back. If you’re not saving on interest, it will still be quite difficult to eliminate your debts. If this is your situation, you may wish to look for a secured loan or you might want to consider other financial debt help options.
While it may seem like there are no options available, that frequently isn’t true. Every financial situation is unique and that means the solution you choose will be unique to you as well.