Debt can cause stress in many areas of your life, and knowing how to manage it can be difficult. A debt consolidation loan is a common choice to consolidate your debts into one payment that feels more manageable.
But before you rush into a decision on how to clear your debts, it’s important to assess all of your options. With the help of a Licensed Insolvency Trustee (LIT), you can look at all available debt relief options to decide on a route that best suits your personal financial situation.
There are other ways to manage your debt other than debt consolidation , from filing a Consumer Proposal to receiving proper credit counselling. Both work as Bankruptcy alternatives to help you to manage your debt and rebuild your credit score over time.
Below we cover the various ways you can consolidate or eliminate your debts with the help of an LIT, to help you decide on the right option for you to take control of your finances and improve your financial confidence.
What is debt consolidation?
Debt consolidation is where you take out a new loan to help you combine all your existing debts into one monthly sum. You’ll then pay off the loan over time, usually in monthly repayments. Since this brings multiple debts together, combined into one loan, this is referred to as ‘consolidating’ them.
The aim of a debt consolidation loan is to consolidate the debt to reduce the interest you’d pay on separate debts. By having all your debt in one place, you’re effectively paying less interest, making the debt repayments feel more affordable.
Disadvantages of debt consolidation
While taking out a debt consolidation loan won’t negatively affect your credit rating (as long as you don’t default on your payments and eventually pay off the debt in full), there are potential disadvantages to consider.
- Interest: Consolidating your debts into an unsecured loan may come with a higher interest rate than what you were paying on your individual debt payments.
- Taking on more debt: While a debt consolidation loan may make your debts easier to manage, you are still taking out a loan and taking on more borrowing. You will still be faced with a potentially large monthly payment.
- Collateral: You may be required to give some form of collateral (also known as security). This may mean that the loan is secured to your home or a valuable asset like your car. So, if you’re unable to make your loan payments you can risk losing car, home or household items.
- Not all debt: Not all debt can be consolidated. Some debts, such as your mortgage, won’t be eligible for a debt consolidation loan.
Will consolidating debt hurt my credit score?
There shouldn’t be negative effects on your credit score with a debt consolidation loan, as long as you make all your monthly payments. If you struggle to keep up with your loan repayments, your credit score is likely to take a hit. So, before you take out a debt consolidation loan, it may be best to weigh up all your debt relief options with the help of an LIT to decide on the best route for your situation.
Alternatives to a debt consolidation loan
While taking out a debt consolidation loan may suit your situation, there are other ways to consolidate your debt, to help you on the road to becoming debt-free.
Filing for a Consumer Proposal in Calgary may suit you if you’re looking to consolidate your debts and reduce the amount that you owe to your creditors. An LIT will act as your proposal administrator to file a Consumer Proposal for you, to ask your creditors to accept a portion of your outstanding debt and forgive the remaining amount. By doing this, your debts will be consolidated into one payment – similar to how a debt consolidation loan would work. You may end up repaying less than the amount you owe, stretch the full amount over a longer period or have the interest rate reduced.
A Consumer Proposal can help to reduce your monthly debt payments by reducing the amount you pay over a period of time, usually up to five years.
Credit counselling in Calgary involves you meeting with an LIT, who is also a trained credit counsellor, to help you assess your budgeting and spending, and put lifelong financial changes into place. You may be able to put together a debt management plan to help consolidate your debts. Your LIT can contact your creditors on your behalf and ask if they would be willing to reduce or eliminate your debts’ interest rates. They may also be able to extend how long you have to repay the money you owe.
Credit counselling can help you to avoid Bankruptcy by having the knowledge and plans in place to deal with your debt repayment. With the support of an LIT, you can discuss any financial worries you have, help improve your credit rating and grow your financial literacy so you feel confident with your finances in the future.
Ready to say goodbye to debt?
At Allan Marshall & Associates, we care about helping people just like you on their journey to becoming debt-free. With the support of one of our Licensed Insolvency Trustees, some weight can be taken off your shoulders.
Contact us today for a free consultation to discuss your debt relief options.