Should you Consolidate your Debt?
When people find themselves juggling monthly payments to various credit cards, loans and lines of credit, the first thing that comes to mind is consolidation.
The main benefits of consolidating your debts are to have a single monthly payment and a fixed interest rate.
Let’s talk about various ways this can be done.
The most common way to consolidate debt is by approaching your bank/financial institution for a consolidation loan. If you qualify, this can be a great way to improve your cash flow and save on interest charges. However, depending on the amount of debt you are carrying and your credit rating, you may need to put up an asset as security for the bank loan, or you may need a guarantor (co-signer) for the loan, usually a friend or family member with a stronger credit rating. Should you default on the consolidation loan, the bank would pursue your guarantor for the unpaid balance.
Home Equity Line of Credit
If you own your own home, you may qualify for a Home Equity Line of Credit (HELOC). A HELOC is a loan in which the lender (your bank or financial institution) agrees to lend a maximum amount within an agreed period of time (term). The bank registers this loan against your home as a second mortgage. For this option to succeed, you must have enough equity in your home to be able to borrow against it. The bank will also require the usual loan qualifiers for you to be approved. HELOCs will have a higher interest rate than a standard mortgage.
One of the main downfalls to a consolidation loan or HELOC is your credit card balances will be zero, and the temptation to use them again may be irresistible. If you are not careful, you could easily end up in a worse position than before: you would be left with both a consolidation loan and new credit card debts.
Second Tier Lenders
What happens if you don’t qualify through your regular financial institution or bank? People are often drawn to borrowing funds from second tier or B lenders. These lenders will often approve you for consolidation or second mortgages, however the interest rates can be and extremely high often higher than your original credit card interest rate. This option may not improve your cash flow like you intended or you may have a lower monthly payment, but the payments are for a substantially longer period of time. One should live by the rule, if you cannot get the loan at a traditional bank or credit union you should not borrow the money.
Consolidate Your Debt
If you do not qualify for a consolidation loan or a HELOC or cannot afford the payments, then it’s time to consider another alternative where you consolidate your debt into one payment without any further interest by filing a consumer proposal.
A consumer proposal is an option that is offered through a Licensed Insolvency Trustee (LIT). A consumer proposal is a formal, legally binding process where you make an offer to your creditors to settle the debt without further interest and normally at an amount much less than what you owe. Each proposal is different based on your individual requirements and circumstances. The payments are made to the LIT and then remitted to your creditors.
To discuss any of the options that may be suitable for your situation, contact D. Thode & Associates Inc. today for a free consultation where the pros and cons of various options will be explained to you.