If you are not personally in debt, you most likely know someone who is, and in many cases, this debt becomes difficult to manage. Debt becomes difficult to manage when repaying that debt in timely manner goes beyond the repayment capability of the person who has it. Thankfully, there are many programs created to deal with debt. Loan consolidation and debt consolidation are two forms of financial help designed for people struggling with too much debt.
What’s important to understand is that loan consolidation and debt consolidation are not the same thing. As an average Canadian looking to get out of debt, you need to be able to tell them apart and ultimately make a decision on what works out best for you. Here is a breakdown of the two solutions.
Part 1: What Is Loan Consolidation?
Loan consolidation involves taking out one larger loan from one lender to pay off several smaller loans. You can consolidate your car loans, credit cards or signature loans. The new larger loan pays off the other loans, so that all of your monthly payments are combined into one single payment, which you are then required to pay to the new lender.
How Does Loan Consolidation Work?
The overall goal of this strategy is to use a single loan to pay off other outstanding debts and bills; however, the repayment terms of the loan will be based on your credit rating. In effect, you decrease your monthly payments because the new loan is subject to a lower interest rate and your debt is amortized over a longer period of time.
Advantages of Loan Consolidation
- You have one monthly payment to a new lender
- Your monthly payment is lower
- The interest charged is comparatively lower than current interest rates
Disadvantages of Loan Consolidation
- You still have debt, it’s merely transferred to just a single lender instead of many
- Eligibility is based on credit rating
- Repayment terms are based on credit rating
- You could lose property attached to the loan if you default on payments
What You Need To Know Before Considering Loan Consolidation
For many people facing debt, loan consolidation can offer a lifeline that can give them another chance to re-organize your finances. However, this will involve taking on a new loan. Essentially, you are not eliminating your debt but rather just shifting it from multiple lenders to a single lender, as well as the due date.
Shifting your debt to a single lender can make it seem like you have huge credit balances on your credit cards, which can be tempting. Unfortunately, in many cases this can lead to spending sprees and land the person in a worse financial situation than they were before. Furthermore, because consolidation loans are secured loans, you run the risk of losing any property attached to the loan if you fail to pay.
While shifting debt can seem like a temporary relief, it also means that you will be in debt for longer.
Part 2: What Is Debt Consolidation?
Debt consolidation means consolidating multiple payments and bills into a single payment using a debt relief plan or program offered by debt consolidation provider. One type of debt consolidation plan that a provider might propose is a Debt Consolidation Program (DCP) or Debt Management Plan (DMP), which are essentially the same thing.
A debt consolidator may also suggest a Debt Settlement Plan (DSP); however, consumers should approach this option with extreme caution as many debt settlement services create a high degree of risk for consumers. For example, many debt settlement agencies are only interested in collecting up-front fees while leaving consumers to deal with disgruntled creditors, most of whom are not interested in waiting for years to accept a pennies-on-the-dollar settlement.
How Does Debt Consolidation Work?
Debt consolidation does not require you to take on any more debt. Instead, your debt relief provider consolidates all of your unsecured debts into a single monthly payment while also negotiating with your creditors to either stop or significantly reduce the interest. This gives you some breathing room to actually pay down the debt, and not just the interest.
The key takeaway here is that your existing payments and loan repayments are restructured so that they make sense for you, your budget and financial obligations without forcing you to take on any new loans or debt.
What Are The Advantages Of Debt Consolidation?
- No additional loan or debt
- A single monthly payment versus multiple
- Lower monthly payment based on current budget
- Reduced interest, if not frozen
- No further accumulation of unsecured debt
- All outstanding unsecured debt is paid off usually within 48 months
Disadvantages Of Debt Consolidation?
- No additional credit while on the program
Considerations before Enrolling into a Debt Consolidation Program
If you decide to sign up for a Debt Management Plan (DMP) or Debt Consolidation Program (DCP) your ability to acquire new credit will likely be limited while you are on the program. This is usually a transformational step for anyone practising how to successfully manage their debt, expenses and finances as they learn how to best optimize their income to accomplish whatever financial goals they might have, including getting rid of their debt.
If you are struggling with debt, debt consolidation offers a true lifeline from an otherwise desperate situation. At Credit Canada, our Debt Consolidation Program (DCP) offers a permanent and holistic approach to dealing with debt successfully. In fact, less than one percent of people who successfully complete our DCP run into debt trouble again. We can proudly say that we have successfully offset the debt burden off of more than two million people, and we are happy to help you as well. Contact us today to learn more about our sustainable debt relief solutions.