Whether you have bad credit or not, one term you may have heard referenced a time or two may be ‘debt consolidation’. While this phrase can lead to differences of opinion and even a feeling of apprehension – there is actually a lot more to debt consolidation and how it can be a useful tool in helping borrowers improve their finances.
That being said, in particular for Canadians who are struggling with bad credit or financial uncertainty, debt consolidation may arise as an option that can potentially help them to salvage their current situation. Therefore, having a little more understanding and insight into this debt-relief approach definitely couldn’t hurt, right??
What is Debt Consolidation?
Debt consolidation is simply-put – the process of taking multiple loans and combining them into one larger loan. If, for example a borrower has more than one credit card with high interest charges and they are finding it a challenge to pay off – then by consolidating these cards into one loan that will typically also have a lower interest rate – ultimately, the idea is that that borrower will then have a better opportunity to pay off the single, lower interest loan.
What are the Benefits and the Downsides of Debt Consolidation?
The Pros of Debt Consolidation:
There are some definite ways that debt consolidation can help alleviate your financial troubles. Read on to see for yourself if consolidating your loans is the right course of action for you.
Debt consolidation can work for you, if:
• you have one or more loans that carry how interest. You can then opt for debt consolidation to reduce your interest charges and help you pay off your loan faster.
• you are finding it too challenging to pay off multiple loans. You can then choose debt consolidation to lower your monthly loans down to one main loan payment.
• you have a home or other assets. Therefore, through debt consolidation you can obtain a reduced interest rate and improve your ability to pay down your loan – or loans with a higher level of success.
• you want to improve your credit score at a more efficient pace, then debt consolidation can make this an even greater possibility as you can more easily remain on top of your payments each month – and in turn your overall debt load.
All in all, with increased progress in your ability to reduce your debt and be consistent in your loan payments across all areas of your credit – you will be able to move out of the bad credit range and into a higher credit score that enables you to gain more borrowing opportunities in the future.
What are some of the most common debt scenarios that may lead to debt consolidation?
• you have a lot of high interest credit card debt
• you have a lot of other types of debt, such as consumer debt, a car loan, and other high interest loans
• you have only been able to pay down interest and not the principle balance on certain loans
• you are a home owner and have a lot of equity in your home
While it might be challenging to obtain a debt consolidation loan if you have what is considered very bad debt, many companies however do recognize that this type of debt-reduction plan can in fact enable borrowers to improve their credit in a significant manner.
The Cons of Debt Consolidation:
While there are many strong cases for choosing to turn to debt consolidation it is still important to be just as aware of when it may not be a good decision for you – and your finances.
You should be cautious of debt consolidation if:
• you are continuing to use you credit cards excessively and may create a lot more debt
• you are using your house as collateral and at at risk of losing it in the event you are not able to keep up with the loan payments
• you choose to consolidate the wrong loans, this can actually work against you as you will still have rising debt levels in other aspects of your credit.
Overall, you want to think carefully about your situation and seek help to secure sound debt-relief advice. Just remember not all debt-reduction plans, such as consolidation will be for everyone, at any given time they are going through a financial hardship.
What is the typical qualification process?
In order to qualify for a debt consolidation loan, while it is common for your credit score to play a factor, it does not have to be perfect to prove your eligibility. Other pertinent information to show a debt-relief specialist to gain debt consolidation assistance is likely to include however:
• Documentation of regular income
• Employment history
• A not-too-high, yet reasonable level of monthly expenses
Ultimately, you want to demonstrate your ability to pay off the loan, much like when you apply for any type of loan. All in all, if you are struggling with your high interest loans, you still want to be able to be able to make the monthly consolidation payment as well. With a lower interest rate and downsizing from multiple loans down to one loan – the idea behind loan consolidation again, is that this loan adjustment should make this task a lot more achievable.
It is very commonplace that there is a fair bit of confusion surrounding the idea of debt consolidation. However, you can use this information as well as additional resources to learn more about the debt consolidation process and whether it may be a good fit for you. At this point in time, perhaps the next step is to seek out a debt consolidation professional and discuss your specific options in further detail.
In short, by taking a stand and fighting back against debt, your bad credit doesn’t have to stick around forever and can turn into a figment of the past. Debt-relief is out there.