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What Is Debt Consolidation And How Does Debt Consolidation Work in Canada?

Debt Consolidation in Canada

If you are facing financial trouble, there are numerous options available to help you get out of debt fast. The most common are debt consolidation and debt settlement Toronto. Debt consolidation services is usually sought after by those who have a number of debts that they wish to merge into a single loan. This consolidation process can be ideal for two different reasons:

  • It helps to simplify the repayment process by giving an individual only one payment to make every other month.
  • It helps individuals to get lower interest rates by getting rid of the high interest loans and securing a consolidation loan with very low interest.

If you are interested in consolidating your debts, speak with your bank or credit card union to see if you qualify.

Taking a debt consolidation Toronto

Most banks and credit unions are able to give this type of loan based on the individual’s net worth. Sometimes the amount that your bank is able to give will depend on how well the economy is doing at the time and whether there are enough jobs. Most times, you will only be given the consolidation loan if you have some form of security. For instance, if you own a new car without a loan on it, you can use it to qualify for a consolidation loan.

One thing that you really need to be aware of when it comes to a debt consolidation loan is that, if you do not make adjustments in your spending it may lead you into further debt. Start by creating a monthly spending plan that will help you to manage your expenses and budget wisely. It’s quick to rely on different credit sources to help you get out of debt but some people find that these lines of credit make them get further into debt.

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Consolidate your debt to your mortgage

Mortgage Toronto

In Canada, you can qualify for a consolidation loan if you have a mortgage depending on the equity you have gathered in your home. Most people actually prefer this option because mortgage loans usually have very low interest rates. Furthermore, mortgages can be paid over a long period of time, say 25 years.

With a consolidation loan taken with your mortgage, you can arrange to have much lower monthly payments. Should you choose to go this route, make sure you don’t miss out on any payments because it can have a negative impact on your credit score. Also try and pay the “second mortgage” as fast as possible so that you are free of debt and work towards rebuilding your credit rating.

Taking a consolidation loan with your mortgage often can harm your credit rating and also waste your money. You shouldn’t choose to go this route often. If you take this type of loan every year or two, lenders perceive that you always spend more than you make and it will take too long for you to eventually pay off your mortgage.

What is Debt Consolidation & How Does It Work in Canada?

Debt consolidation involves getting a single loan in order to pay off all your smaller loans and make one monthly payment each month. You may have smaller loans, bills or debts that are hard to manage or have high interest rates. Consolidating them into a single new loan can help you manage the debt better and pay it off sooner. Debt consolidation is different from debt settlement because the later has a negative impact on your credit score and you don’t have to pay your debt in full. With consolidation, you have to pay off all your debts in full.

In reality, there is no such thing as merging multiple loans together. Each loan has different terms. They vary in interest rates and repayment terms. Therefore, what consolidation does is that it allows you to take a new loan that caters to all those smaller debts, pay them off at once and then begin servicing the new loan. This is often an option for people who have credit card balances, overdraft balances, bills and smaller loans that attract really high interest rates.

In Canada, banks and other finance companies such as credit unions offer debt consolidation loans. The main benefit of combining multiple smaller loans and taking a new loan with a lower monthly payment is that it may provide you with emotional and financial relief. However, you need to make serious financial changes in your life to avoid additional debt so as to pay off the consolidation loan.

Is a Debt Consolidation Loan Good For You?

There is no denying that debt consolidation loans have helped numerous people get out of debt sooner. However, there are some downsides to consolidation that many people fall victim to without knowing it. There are many people who apply for a consolidation loan without making changes in their lifestyle or improving their financial habits. Once they qualify for a consolidation loan, they feel as if they’ve made a smart decision by making the debt more manageable and lowering the payments.

However, with lower monthly payments it means they get more money every month to spend and if they maintain the same unhealthy financial habits, it’s easier to get into a worse financial situation. If debt consolidation loan is good for you, make a conscious decision to get rid of all unhealthy financial habits. You must create a budget and follow it so that you can stop spending more than you make each month. Acquire proper financial discipline so that even after you qualify for a debt consolidation loan, you do not slowly slip back into debt because your expenses are still the same.

Do not fall into the trap of re-accumulating debt after taking a consolidation loan. Remember, this is a new loan that you must use properly if you want it to help you in the long run. Use it as a stepping-stone to attain financial freedom.

Different Ways to Consolidate Debt – The Big Picture Answer to the Question “What is Debt Consolidation

There are several debt consolidation options for you in Canada. The option that is right for you will depend on factors such as your credit score, income and level of debt. We’ll go over the most common options below:

Home Equity Loan

If you’ve been paying your mortgage for many years, you may have acquired a good amount of equity in your home. A bank can consider giving you a ‘second mortgage’, which usually comes with a lower interest with your home equity as a form of security. With this kind of arrangement, you must fulfill your end of the agreement or you risk losing your home.

Line of Credit

A bank or credit union may approve you for a line of credit, which can be secured or unsecured. If you have a good income, you may qualify for an unsecured line of credit. With this type of consolidation, you must be able to pay a monthly payment that is higher than the minimum if you want to pay off the debt sooner. If you only pay the minimum, you’ll take very many years to get out off debt.

A Debt Consolidation Loan Offered by the Bank or Credit Union

If you do not qualify for a home equity loan or lines of credit, you can apply for a debt consolidation loan offered by a bank or credit union but expect to pay a slightly higher interest rate. Most people will only qualify for this option if they have good credit or really good security for the loan.

A Debt Consolidation Loan Offered by Finance Companies

A finance company may also offer you a debt consolidation loan but you must be cautious because they usually have very high interest rates. Remember the higher the interest rate, the longer it will take you to clear the loan.

Credit Card Balance Transfers

This is also an option if you have credit card debt with high interest rate. However, you must pay off your balance within the promotional period given to avoid ending up paying off the debt with the normal interest rate.

Low Interest Credit Cards

This is an option if you have a good credit score but banks and credit unions don’t give you a consolidation loan. This option requires a lot of financial discipline because you’ll have higher monthly payments to make in order to pay off the balance in good time.

Debt Repayment Programs

This is ideal if you are struggling to pay off even the minimum payments. The plan may involve eliminating interest and consolidating the debt payments into an affordable loan. These programs are only encouraged for certain financial situations so you need to understand their pros and cons before diving in.

The type of debt consolidation option that is right for you will depend on different factors such as your credit score and individual financial goals. Just know that consolidation is not a short time solution to make your life easier or just get by for a while. Endeavor to change your financial habits and spend money more wisely even after taking the consolidation loan.

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