Not being able to repay loans you owe is a daunting situation. With a little research, you may find plenty of options with the claim to make you debt-free. However, there is no guarantee they will actually serve the purpose as promised by them. One of these options, which is usually suggested by many, is to apply for a debt consolidation loan.
If you are confused whether to go with this option or not, this post will help to make up your mind. In this post, we have covered all that you need to about debt consolidation loans in Canada. Continue reading to know more.
What is a Debt Consolidation Loan?
A debt consolidation loan, in Canada, works by combining different loans into one debt. Picture this scenario: if you have multiple loans with higher interest rates to repay, you can apply for a debt consolidation loan and get them all combined into one with a lower interest rate.
What are the Benefits of Canadian Debt Consolidation Loans?
There are a number of benefits associated if you are applying for a debt consolidation loan. A few of them are discussed in detail below:
Less Damage to Credit Score
As we all know, not paying loans within the given time frame can have a negative impact on your credit score. A poor credit score can be difficult to recover. In case you are opting for a debt consolidation loan, there are chances of redemption in your credit card score apart from protecting it. This is because all creditors will be paid quickly.
Single Payment Each Month
A debt consolidation loan will save you from the hassles of making multiple payments every month. You will no longer have to keep a track on which creditor you have paid and which ones are pending. With a debt consolidation loan, you will be required to make a single payment each month. There will be no more cases of a forgotten payment to a creditor, which can greatly affect your overall credit ratings.
Lower Interest Rates
As stated above, the lower interest rate is charged for debt consolidation loans. High-interest loans are combined into one and companies that offer these loans typically charge a lower rate. This lower interest can make it easy for you to repay debts in hard times.
Low Amount to be Paid Each Month
With a debt consolidation loan, you will be required to pay a lower amount each month. Amounts of different loans can be difficult to be repaid when accumulated. This issue is eliminated if you have gone with the debt consolidation loan option. Hence, you will be spared from spending a major chunk of your income on repaying debts.
A Stress-Free Option
One of the most prominent benefits of going for a debt consolidation loan is that it eliminates all the stress and hassles associated with multiple loan payments. There will be no pressure from creditors in form of repeated emails and phone calls. Furthermore, you will be able to manage your expenses in an improved manner.
Drawbacks of Debt Consolidation Plans
Debt consolidation plans are not without their share of drawbacks. Here are some of them:
Not Suitable for Retiring Debts
If your motive is to retire your debts, then a debt consolidation plan may not work in your favor. Although the rate of interest is on the lower side, you will eventually have to pay the entire principal amount you owe.
A Lengthy Process
A Canadian debt consolidation plan may take a longer period for your debts to be completely written off. This is because small payments are made.
Different Debt Collection Options
There are eight ways to consolidate debts in Canada. These are:
- Consolidate by Borrowing from Family or Friends
- Consolidate using a Debt Consolidation Loan
- File a Consumer Proposal
- Consolidate using a Line of Credit or Overdraft
- Consolidate using a Home Equity Loan / Refinance Mortgage / Second Mortgage
- Consolidate debt on your Credit Cards
- Consolidate by doing a Debt Settlement
- Consolidate using a Debt Management Program
Each of these options has their own merits and demerits. Thus, it is advised to seek expert advice before finalizing the most suitable one for you.
As stated above, there are numerous other options, apart from debt consolidation loans, that can help you to be loan-free. Whether this option is suitable for you or not, this depends on numerous factors, i.e. a number of loans you have to repay, the total amount of money, interest rates on each debt, etc.
If you are still confused and cannot find the right decision, it is recommended to seek expert advice. For more information, you can contact any financial company that offers debt consolidation loans as well.