Credit cards are a form of unsecured loan that the issuing bank provides in order to allow you to make purchases and pay at a later date. A consolidation loan, on the other hand is a secured debt that you can take with your mortgage and have your home as collateral. The reason why most people will take a consolidation loan if they are in credit card debt is to be able to pay lower interest and clear what they owe much faster.
With debt consolidation Toronto, you are able to combine multiple loans that have different interest rates. Some forms of debt such as credit cards, usually have very high interest rates. When you take up a consolidation loan, and are able to make a single monthly payment, you can enjoy lower interest. This means that most of the money you pay every month will go into clearing the principal amount of your loan. This is what allows you to clear the debt within a shorter period and improve your credit rating. Consolidation loans work well for those who have credit card debt and a relatively good credit score.
Other than taking a consolidation loan, you can choose to consolidate your credit card debt on your own. There are lending institutions that offer 0% interest balance transfer credit card. This rate is usually offered for a short period of time, say 6 to 18 months. During this time, all the payments you make to settle the debt will go towards reducing your balance. Once this introductory rate lapses, you will then be given an interest rate of 13-27% on the amount left. You need to find out if the balance transfer card is going to have additional fees. There are those that charge transfer fees and annual fees which further increase the cost. This option is most suitable for those who are certain that they will pay most of the debt during the introductory rate of the transfer credit card.
Debt consolidation may not work for you in certain instances. For instance, if you do not make a conscious decision to cut back on your spending, taking a zero-interest balance transfer may not help you to get out of debt. If you use this new zero-interest balance transfer card the same way you used your other credit cards, you might end up in even more debt.
It’s important to understand that debt settlement Toronto can have serious ramifications on your credit rating. You may experience a severe hit in your credit rating that might take several years to clear. Should you want to obtain a credit card in future, you may be required to pay high interest rates. However, should you decide to consider a consolidated loan, you can work towards building your credit score and get a better interest rate. Just remember than any missed payments can put you at risk of losing your home.