When you have multiple debts from various creditors, it can become overwhelming to manage them all. Juggling various debts at varying interest rates and repayment amounts can not only be confusing, but it can also make it difficult to prioritize your repayments.
Oftentimes, debtors will look to something like a debt consolidation loan as a quick fix to their debt problems. While it may seem illogical to take out yet another loan on top of your existing loans, there can actually be some benefits to debt consolidation loans as it can become the loan to end all loans.
With a debt consolidation loan, you can use it to pay all your existing loans so that you end up with only one debt payment to manage each month until you ultimately become debt-free.
However, debt consolidation loans are not for everyone. Here’s how debt consolidation works in Canada.
How does debt consolidation work?
A debt consolidation loan is a single fixed-term loan meant to replace several high-interest loans. For example, let’s say that you owe $2,500 on one credit card, $3,200 on another credit card, $1,500 on a department store card and $8,500 on a car loan. Your total debt would be $15,700.
With four loans, it can be different to keep track of each of these monthly bills and statements. Not to mention, each of these loans will have different fees, interest rates and repayment dates. With so many bills bombarding you every month, you will have a very tough time managing your debts.
By consolidating all of these loans into one, you’ll have just one monthly debt repayment amount, one interest rate and one set of fees to worry about. More importantly, you can usually get a debt consolidation loan at a lower interest rate than credit cards and other high interest loans. If there are any other fees to pay, such as late payment fees, then there will be only one fee, which can be lower than that of several different fees combined.
When should you consider debt consolidation?
It’s typically a good idea to get a debt consolidation loan if you have several small loans with high interest rates and fees, such as credit cards. If your loans are large, it’s often not a good idea to get a debt consolidation loan because you may end up with even more fees and a higher interest rate.
With a debt consolidation loan, your debt essentially remains the same. You’re trading in multiple loans for one. So if there is no added benefit, such as a lower interest rate, it’s not worth it.
How to know if debt consolidation is right for you?
If you are unsure about taking out a debt consolidation loan, then you should add up all the different loans you have and their combined interest charges and fees. While doing that, you should also take into account the time and energy it takes to manage all those loans. Next, you should research lenders and find out their interest rates and fees. Using a financial calculator, such as our line of credit and loan repayment calculator makes it easier to see the picture clearly and arrive at a decision.
A debt consolidation loan may not always be the right option for solving your debts. Talk to one of our credit counsellors to find a solution that works for you. Call us today at 1-888-753-2227 for a free consultation.