Debt Consolidation

What Is Debt Consolidation?

Debt consolidation refers to the act of taking out a new loan to pay off other liabilities and consumer debts. Multiple debts are combined into a single, larger debt, such as a loan, usually with more favourable payoff terms—a lower interest rate, lower monthly payments, or both. Debt consolidation can be used as a tool to deal with student loan debt, credit card debt, and other liabilities.

KEY TAKEAWAYS

—Debt consolidation is the act of taking out a single loan to pay off multiple debts.

—There are two different kinds of debt consolidation loans: secured and unsecured.

—Consumers can apply for debt consolidation loans, lower-interest credit cards and HELOCs.

—Benefits of debt consolidation include a single monthly payment in lieu of multiple payments and a lower interest rate.

How Debt Consolidation Works

Debt consolidation is the process of using different forms of financing to pay off other debts and liabilities. If you are saddled with different kinds of debt, you can refinance your property for a loan to consolidate those debts into a single liability and pay them off. Payments are then made on the new loan until it is paid in full.

As your mortgage broker, I will negotiate with different banks for a debt consolidation loan as our first step. If we are turned down, exploring private mortgage companies or lenders will be one of our options.

Creditors are willing to do this for several reasons. Debt consolidation maximizes the likelihood of collecting from a debtor.

Debt Settlement vs. Debt Consolidation

An important point to note is that debt consolidation loans do not erase the original debt. Instead, they simply transfer a consumer’s loans to a different lender or type of loan.

Debt settlement aims to reduce a consumer’s obligations rather than the number of creditors. Consumers can work with debt-relief organizations or credit counselling services. These organizations do not make actual loans but try to renegotiate the borrower’s current debts with creditors.

Advantages and Disadvantages of Consolidation Loans

If you are considering a debt consolidation loan, there are advantages and disadvantages to consider.

Advantages

Debt consolidation is a great tool for people who have multiple debts with high-interest rates or monthly payments—especially for those who owe $10,000 or more. By negotiating one of these loans, you can benefit from a single monthly payment in lieu of multiple payments, not to mention a lower interest rate.

And if you do not take out any additional debt, you can also look forward to becoming debt-free sooner. Going through the debt consolidation process can cut down calls or letters from collection agencies, provided the new loan is kept up to date.

Disadvantages

Although the interest rate and monthly payment may be lower on a debt consolidation loan, it is important to pay attention to the payment schedule. Longer payment schedules mean paying more in the long run. If you are considering consolidation loans, we will investigate how long it will take to pay off debts at their current interest rate and compare that to the potential new loan.