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Debt Consolidation: How Does It Work?

happy couple after following debt consolidation plan

Debt consolidation is the process of combining multiple loans into a single loan and can be a good option for people who want to simplify their finances. In this article, you will learn about the benefits of consolidating your debt and how it can improve your overall financial situation.

A considerable number of Canadians out there know the reality of having a loan all too well. They know the ins and outs of getting a loan, what repayment terms and interest rates are and what an affordable monthly payment should be like. Even with all its terms and conditions, a single loan is still relatively easy to manage.

However, some people hold multiple loans simultaneously, which tends to take their financial situation to a new level of complexity and risk.

Why does this happen? Firstly, because having more loans means having to follow multiple accounts to keep in check with all the terms and conditions attached to them. Secondly, having to repay debt in several different places can take quite a toll on a person’s emotional well-being, let alone finances.

Thankfully, debt repayment has seen quite the makeover over the years, and there is now more than one way to pay back a debt. Or, in this case, several debts at once. It’s called debt consolidation.

What Is Debt Consolidation, And How Can It Help?

So how does debt consolidation work, after all? 

Debt consolidation is the process of merging higher-rate credit cards and other loans into one new loan with a low monthly payment.

You may be wondering how a debt consolidation loan can help you get out of debt. It’s simple, really. With multiple debts, it can be difficult to keep track of all the monthly payments. Late or missed payments lower your credit score — and so does having many open accounts.

Other than that, a balance over 50% of your accounts limit lowers your credit score over a few months. By taking care of all these issues, your credit score can improve significantly in as little as 3 months.

Once your debt is consolidated, you can use any extra money toward paying off your new loan — and not just for interest or minimum payment amounts. This will help you get out of debt faster than if you were making minimum payments on each loan separately. 

Debt consolidation loans can also help you save money on interest rates, late fees, and other charges associated with your current bills. 

More Reasons People Opt For Debt Consolidation

Debt consolidation loans are a popular choice among individuals that juggle multiple debts for several reasons:

Higher Efficiency

No one likes to keep track of several responsibilities all at once. This is where debt consolidation steps in and offers a great alternative. Instead of trying to remember to make on-time payments for multiple loans, you can easily just have one and get rid of the hassle. 

Safer For Your Credit Score

When you have multiple debts to manage, it can be easy to overlook one monthly payment and forget to pay the amount due. This will, naturally, negatively impact your credit score. With debt consolidation, though, you only need to make one monthly payment, and that’s really difficult to miss. So, consolidating your debt actually becomes the smart move to make if you’re diligent in creating a great credit history.

Better For Your Budget

Combining all your debts into one will actually spell good news for your bank account. This is because debt consolidation may allow you to benefit from lower interest rates. Your budget may also benefit from the fact that you’ll know exactly what to pay each month, so organising your finances can become considerably more effective. 

In other words, consolidating your debt allows you to save money and time — and free up some mind space.

Of course, there are also a few good things to remember if you’re looking to opt for debt consolidation. It’s only by balancing the benefits with the best practices that you can make the decision that suits your financial needs.

What Should You Consider Before Opting For Debt Consolidation?

Not all debt consolidation plans are made equal. You’ll need to weigh in all the factors that are specific to you.

Reasonable Term

Make sure your new term is of reasonable length. Otherwise, if your new contract term is too long, you may end up spending more than you wanted.

Extra Fees

As with any other kind of loan, make sure you’re well aware of the terms and conditions before you sign, particularly paying attention to all the fees and charges.

Interest Rate

Pay attention to the interest rate as well. After all, you don’t want to get your budget in trouble. 

What Is a Debt Consolidation Mortgage?

Mortgages and home equity loans are our specialty. But so are debt consolidation mortgages! 

A debt consolidation mortgage allows you to use the value of your property to pay off other debts such as credit card bills, personal loans, or car financing. With a debt consolidation mortgage, you will have just one monthly payment instead of several, which can help you improve cash flow and credit.

estimating debt consolidation mortgage costs

Regardless of bad credit or an unemployment history, as long as you have enough equity in your property, one of our lenders will be willing to offer you a good mortgage tailored to your needs. This may be significantly better than the interest rate on your existing debt, especially if it is credit card debt.

All you need to apply for a debt consolidation mortgage with one of our alternative lenders is: 

  • Online Application
  • Client Agreement (will be emailed)
  • Current mortgage statements (1st or subsequent charges)
  • Appraisal

We’re Here To Help

Home equity loans, mortgage loans, or debt consolidation. Regardless of the type of loans you are interested in, or juggling with, one of our private lenders can always help.

If you need credit counselling and want to better understand the world of loans and mortgages while getting a second opinion regarding your debt consolidation plans, simply contact us. We’ll happily share our expertise with you. Hopefully, we’ll be able to help you get the financial solution you need.

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