Is Debt Consolidation the Solution to Your Financial Woes?

April 12, 2018

Thirty-seven per cent of Canadians feel overwhelmed by their debt load. Debt Consolidation programs in Canada can help people with multiple unsecured debts better manage their finances, improve their credit score and become debt free fast.

According to the Canadian Payroll Associations, 37 per cent of Canadians feel overwhelmed by their debt. Considering household debt in Canada reached $2.08 trillion in 2017, overwhelmed might be an understatement. The good news is that insolvency in Canada has slowly decreased over the last decade, meaning less Canadians are filing consumer bankruptcies and proposals. With average household debt inclining, it seems ironic that there’s been lower insolvencies. However, Debt Consolidation might be the thing to credit, as more Canadians with multiple unsecured debts are turning to this type of financing for debt relief.

What is Debt Consolidation?

Almost every one of us has debt, some more than others. In the circumstance where a person has multiple unsecured debts (loans that don’t require an asset to obtain, i.e. credit cards or student loans), a debt consolidation loan can be a great solution for paying back creditors. Offered by financial institutions and debt consolidation companies, debt consolidation combines a person’s multiple consumer debts into one loan. Pooling consumer debt can help those who have debt exceeding $10,000 or more, are receiving notices from collection agencies or have accounts with high interest rate, as debt consolidation loans typically have lower interest rates and monthly payments.

READ MORE: How To Handle A Collections Account

It’s important to note that transferring your unsecured debts onto one loan won’t erase your debt. However, a debt consolidation loan can help a person save money from high interest rates and monthly payments (this is especially true if a person is constantly over their monthly credit limits or if their accounts have high interest rates). With lower fees, debt consolidation loans allow a person to pay off all their debts more quickly, which can also boost credit.

To be eligible for a debt consolidation loan, a person must have the credit and income necessary to get approved for a low interest rate. Financial institutions or debt consolidation services will look at the applicant’s credit history, and will typically request a letter of employment, credit card statements and letters from creditors or repayment agencies. Once a person has been approved for a debt consolidation loan, it’s important to figure out what unsecured debt needs to be paid off first. A good strategy is to pay off the largest amount of debt with the highest interest rate.

READ MORE: 3 Easy Strategies To Pay Off Debt

Disadvantages of Debt Consolidation

Rolling your existing debts into one loan has its financial benefits. However, it’s crucial that payments are made on time to the debt consolidation loan, otherwise the it could increase your risk factor and put you in a sticky situation. Although interest rates on a debt consolidation loans might be smaller compared to individual unsecured debts, payments on a consolidation loan will likely be stretched out over a longer period of time – this allows lenders to give consolidation loans lower rates and more manageable monthly payments. It might be easier to obtain a secured debt consolidation loan (a loan backed by expensive assets), however this could be a major risk factor for those who can’t make monthly payments. Before applying for a debt consolidation loan, research is critical. Maintaining a relationship with creditors and asking them for information on your current debt situation will help you compare the factors of the consolidation loan that you’re considering.

Debt consolidation loans should only be used by people who are overwhelmed with their debt load and feel like they need help managing finances. If you’re considering a loan to help rebuild credit and better manage debt, give Fresh Start Finance a call right now!

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