One way to repay back debts is to use a debt consolidation loan. This is when you apply for a new loan and use the proceeds to pay off all the other debt you have accumulated. Then you only have a single monthly payment to make, and hopefully, this new Kitchener debt consolidation loan is at a lower interest rate than you had been paying to all those other creditors.
What is a debt consolidation loan and how does it work?
If you are in a position to borrow on a loan large enough to pay back other amounts, you can reduce or eliminate many types of debt including credit cards, payday loans, utility bills, lines of credit or other items. In Canada, it is not recommended that you include student loan debt in this plan.
There are two basic types of loans: unsecured through a bank, credit union, or other financing company, or through a new credit card with low or 0% interest for a specific period of time; or a secured loan like a second mortgage, home equity loan or line of credit.
The pros and cons
Before leaping into this plan, it is best to look at both the pros and cons to see if this is the best solution for you.
- If the new loan does not carry a lower interest rate, it will be of no benefit.
- Secured loans generally have the better interest rate available, but you need to have sufficient collateral to qualify. Secured loans will put the security at risk. That is, if you pledge your car as collateral and you default on the payments, your vehicle may be repossessed.
Unsecured debt is easier to get but you may not be appropriate for an interest rate low enough to do you any good. Looking at your debt-to-income information, the potential lender may consider you a bad risk
A line of credit can sometimes offer interest-only payments. That would allow your budget to stretch to make the payments more easily, but it will extend the time before the debt is fully repaid. Lines of credit also usually involve a variable interest rate. That is fine if interest rates are low, but if they climb, you will suffer.
You can also keep payments low by extending the term of your loan. With this strategy, you will have lower monthly payments but you will pay more over time in interest payments.
A Kitchener debt consolidation loan works best when you have a good credit score and can obtain a relatively low interest rate on the loan. You will have enough consistent income to cover the payments. Do not return to bad habits and run up new credit debt. The last issue can be resolved with a solid plan of repayment and counselling to help you understand how to avoid the situation in the future. After you have discharged all of the old debt and you get some new credit cards, you must be sure to pay the balances in full each month.
If your debt-to-income ratio is below 40% a debt consolidation loan probably is not a good choice. That would mean eventually paying more in interest over time and even a higher rate than you are paying now on the credit you have accumulated.
If you think that Kitchener debt consolidation is a good answer for you, you may want to spend some time with a financial counsellor who can help you with a budget and help develop a plan for the future that takes into consideration the variables we all face every day.
Dana MacRae Licensed Insolvency Trustee has been helping people manage their debt since 2000. With 10 offices across Southwestern Ontario, it’s easy to schedule an appointment. Just go to www.danatrustee.ca and book your appointment online. We offer video conferencing, or book a home consultation and have the trustee come to you (when allowed by COVID-19 protocols). Contact us today at 1.800.665.9965 or info@danatrustee.ca to learn more about our services and find the financial solution that’s right for you.