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An introduction to debt consolidation loans

An introduction to debt consolidation loans

Every Canadian deals with debt at some level throughout their lives. Mortgages, auto loans, and high interest credit cards are the most common sources. In some cases, a person’s outstanding balance becomes overwhelming, and the monthly payment obligations become a challenge to repay. When that occurs, one of the best actions to take is to consolidate debt.

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What is a debt consolidation loan?

To consolidate something means to gather multiple objects into one whole. When you consolidate your debts, your multiple financial obligations are paid with one loan, and you simplify things with one payment. Most financial intuitions, like banks or alternative lenders, have consolidation programs available. In most cases, you will receive a single loan with a lower interest that can be used to pay off the higher interest debt obligations; leaving you with a single monthly payment that usually carries a lower interest rate and a lower monthly payment.

Debt consolidation solutions can also come in different forms. Some classic ways to consolidate debt include personal loans, credit lines, and home equity loans or lines of credit.

How does debt consolidation work?

As previously mentioned, the three methods of consolidating debt include personal loans, credit lines, and home equity loans. While each of them have the same end goal, they each work a little differently and have unique requirements.

Personal loans are lump sums that can be received from banks or alternative lenders. To determine the size of loan you should apply for, you can take your outstanding balance and calculate how much you could potentially pay per month, including the interest and/or you can add up the total amounts you owe; see if you can obtain a loan to pay off all of the higher interest obligations. You can also decide how long you would like the payment term to be or what type of interest rate you’d like, fixed or variable rates. As with all loans from the bank, your credit history will be checked as part of the application process.

Lines of credit are usually compared to personal loans because both have a maximum amount you can obtain from a bank or financial institution. Unlike personal loans, a line of credit is not a lump sum advance of funds; instead, you have access to funds that you can use all at once or the funds can be drawn upon over time. If you’re consolidating your debt, you can direct the funds from your line of credit into your outstanding amounts, leaving just the one line of credit to pay back.

One other option is home equity. By accessing the equity in your home, you may be able to receive a home equity loan or home equity line of credit (HELOC). The main difference with a home equity loan or line of credit is that the funds you receive are secured against the equity in your home—in essence, you are borrowing “against” the equity in your home. Because of this, home equity loans typically are offered with a lower interest rate than an unsecured loan or line of credit. Home equity can play an important role in your financial journey.

Is debt consolidation good or bad?

Before deciding on debt consolidation, it’s important to look into the benefits of benefits and drawbacks that come with doing it. Some of the advantages include:

Lower interest rates

Interest rates make up a significant portion of monthly payments. With debt consolidation, there is only one installment per month, with a manageable interest rate instead of multiple payments with high interest. For example, credit card charges usually have the highest interest rates, so utilizing a debt consolidation loan will eliminate that interest rate and replace it with a lower rate.

Single monthly payment

One payment per month is easier than trying to keep track of multiple creditors. The due date reminders and bills in the mail can easily be neglected. With a single payment, you may not even need to set reminders, which should simplify the management of your debt obligations.

Quicker debt elimination

Lower interest rates allow you to pay more towards the principal amount. You can reduce the time it takes to pay off that principal while paying less per month.

Consolidation is a great solution for those dealing with large amounts of debt. However, consider the following disadvantages and your own specific financial situation before making a final decision.

Difficult approval process

To be approved for debt consolidation at banks and other traditional lenders, borrowers will have to meet application and approval criteria. The banks and traditional lenders conduct extensive background checks, looking into your credit score and income. Many are turned away because they do not meet the approval requirements.

Possible high interest rates

If someone with a fair credit score is approved at the bank, higher interest rates may be assigned to them because of their credit history. It is important to compare the total monthly expenditure to the current payments without consolidation.

Require more responsibility

Even with one payment, it’s important not to overlook due dates. Debt consolidation is helpful and has a lower interest rate, but remember the overall amount due does not change. One payment per month is a lighter load, but is not an excuse to be carefree about money.

Effects of debt consolidation

Any additional financial responsibility will decrease credit ratings in the beginning. However, once you are in the rhythm of making regular payments, you will start to see some positive effects on your credit score. Namely, you’ll see a rise in your credit score. With all debts getting paid from the line of credit or the personal loan, your credit bureau gets “cleaned up” because long-standing debt obligations have been paid off and only a single new obligation remains. In addition, making the regular monthly payment for the debt consolidation loan signifies that you are more than capable to fulfill the debt obligations.

Generally, debt consolidation doesn’t negatively affect a person’s credit score. Many people choose to do so because it reflects well on their credit score, leading them to more lending opportunities that allow them to obtain investment properties or renovate their home.

Debt consolidation loans with Alpine Credits

Participating in a debt consolidation plan is not always as simple as it seems. A person’s credit score still plays a significant role in the approval process, so those with less than ideal scores typically get turned away. However, getting turned away at banks does not mean your options have come to an end.

Homeowners have the opportunity to consolidate their debt with a loan from their home equity. Typically, homes build a lot of equity over time, and if you’ve paid down at least 25% of the property’s value, you can access that equity and apply it towards your debt. The financial solution specialists at Alpine Credits are here to help you navigate your home equity loan application. Your property holds a lot of value and can be one of the ways to help you reach your financial goals without needing to consider the impact of your income or credit history; like the banks or other traditional lenders. Contact the team of home equity loan specialists at Alpine Credits today, and they can answer your questions and start you on the path to debt consolidation.

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