Is getting a new loan to consolidate debts or pay off credit card debt a smart idea?
One way to pay off debts is to take out a debt consolidation loan. A consolidation loan allows you to make one monthly payment at a cheaper interest rate than you would with your current credit cards. Consolidating your debts might also help you enhance your credit score if done appropriately. However, there are drawbacks, which is why you should weigh all of the benefits and drawbacks of using a consolidation loan to manage your debt before applying.
What is a Debt Consolidation loan and how does it work?
Using the revenues of a new consolidation loan to pay off the present outstanding sum on any troublesome debt is one strategy to consolidate your debt.
You can consolidate various types of debts, including credit cards, payday loans, lines of credit, utility bills, cell phone bills, and even income tax debts, if you can get a large enough loan. Although this is not usually a smart option, it is feasible to rollover vehicle loan debt into a consolidation loan. Consolidating student loan debt is also not usually a good idea in Canada.
Pros and cons of Debt Consolidation
- It’s important to keep in mind that you’re opting to combine several existing obligations into a single new loan. You’re taking on more financial risk, which can have unintended repercussions if done incorrectly.
- A lower interest rate on a debt consolidation loan should make the monthly payment more manageable and save you money on interest payments.
- Secured loans have the lowest interest rates and are simpler to obtain if you have the necessary collateral. Secured loans, on the other hand, might be risky because any pledged property is at risk. If you fail to make your monthly payments, your lender may seize your home or vehicle to recover any unpaid loan balance.
- You can potentially reduce your monthly payments by extending your consolidation loan’s term or amortisation time. Some of these savings are lost if you extend the amortisation period, or the length of your loan. Your monthly debt repayment may be much smaller with a longer-term loan, but you will pay more in interest over the life of the loan.
Bottom Line
A debt consolidation loan can help you improve your credit score if you don’t take on more credit than you can repay, avoid high-interest subprime consolidation loan options, and make all payments on time. Debt problems are not solved by taking on more debt. You need to look beyond a high cost bad credit debt consolidation loan.
Contact us at [email protected] and we will run the numbers, based on your personal financial situation, and help you compare a consumer proposal with a debt consolidation loan to see which program can achieve your debt consolidation goals and get you started on repairing your bad credit, all while eliminating your debt.
Disclaimer: Canadian-debtrelief.com is a debt consultancy service, we are not an authorized blogsite and are only advisors providing you with the tools and information to help you get out of debt.
