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What is debt consolidation?

What is debt consolidation? 

Canadians face common financial obligations like mortgages, auto loans, and high-interest credit cards. The solution to juggling multiple monthly payment obligations is to look into a debt consolidation loan. Many people wonder, “What is debt consolidation?” It can be a financial tool to help you restore healthy spending habits and simplify your payments. 

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An introduction to debt consolidation 

Debt consolidation means gathering your outstanding charges from multiple credit cards and loans to ease your financial management. By receiving a lump sum that can cover the cost of your debt streams, you can focus on repaying just one lender at a comparatively lower interest rate. Debt consolidation is a great way to reorient your finances, making it important to understand how it works and how it can help you.

What is a debt consolidation loan? 

When you consolidate your debts, your multiple financial obligations are paid with one loan, and you simplify your responsibilities with one payment. Most financial institutions, like banks or alternative lenders, have consolidation loans 

In most cases, you will receive a single loan with a lower interest that can be used to pay off the higher-interest credit card debt obligations, leaving you with a single monthly payment that usually carries a lower monthly payment. 

Debt consolidation can come in multiple forms, like a line of credit, a credit card loan, or a balance transfer credit card. For all of them, getting approved can depend on your credit standing and income. To make debt consolidation more accessible, Alpine Credits offers home equity loans to homeowners with at least 25% equity.

Debt consolidation vs debt settlement

Consolidation loans are not the only way to manage multiple debts. Another way people manage their outstanding loans is by negotiating a new deal with their creditors. You could get a lower interest rate, pay less of what’s outstanding, or both. 

Debt consolidation loan  Debt settlement 
  • One loan, one interest 
  • Not all lenders report to credit bureaus 
  • Interest rates vary between lenders 
  • Opportunity to build new habits and save money 
  • Length of loan term matters 
  • Negotiation to decrease debt via third-party service 
  • Stays on credit history, which includes late payments 
  • Can be done with credit services or individually 
  • Negotiations need to be successful 

 

How does loan consolidation work?

Consolidation loans are like personal loans, but they’re to repay multiple lines of credit and outstanding loans. They’re also lump sums that borrowers receive if their financial background is eligible. Sometimes, consolidation loans have more value than personal loans, but people do use a personal loan to consolidate debt.   

After obtaining a consolidation loan, the borrower is responsible for making regular payments until the loan is completely paid off. In that sense, they work very similarly to bills and mortgages, with a single statement and amount that needs to be paid on time each month.

Example of debt consolidation with a home equity loan 

One way to consolidate credit card debt and other financial obligations is by applying for a home equity loan. Jean and Luc, a couple from Vancouver, collaborated with Alpine Credits and received the loan they needed to get his finances back on track.  

[Read more: A case study on a consolidation loan in BC 

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When should you consolidate your debt? 

Consolidation loans are a tool that can help many Canadians improve their financial situations. Some indicators that make you consider consolidating your financial obligations include the following.  

  • When you have multiple monthly payments—while monthly payments can be automated, generally, the less you have, the better. Focusing your resources on one loan can help you budget more accurately.   
  • When your cumulative interest rate is too high—with multiple payments, your interest can accumulate quickly, meaning that only a portion of your payment goes toward the principal balance.  
  • When you want to plan your financial future—debt consolidation can be both a preventative and restorative action. You can use a debt consolidation loan to keep your credit score from decreasing or to improve your creditworthiness.  

[Read more: Seven reasons to consolidate your debt]  

Is debt consolidation good or bad?

Debt consolidation can positively impact your finances, but it’s good to know some of their downsides, too.   

Pros 

  • Lower interest rates—compared to credit cards, debt consolidation loans may have more reasonable interest rate offers.  
  • Manageable monthly payments—even if your debt consolidation loan doesn’t cover all your outstanding debt, it still reduces how many payment streams you have.  
  • Quicker debt elimination—many Canadians aim to have less debt, and a consolidation loan can help achieve that.  

Cons 

  • Require some financial diligence—because consolidation loans are still loans, they should be used for their intended purpose and not to make additional expenses.  
  • Difficult approval processes at traditional lenders—banks and credit unions may still require applicants to have a strong credit score, making it challenging for some to improve their creditworthiness.  
  • Interest rate offers vary—some lenders will allow borrowers with low credit scores to obtain this loan but may attach a high interest rate that may be higher than the credit cards they have.

Effects of debt consolidation 

Taking on 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, even a rise. 

With all debts paid from the line of credit or the personal loan, the credit bureau “cleans up” your credit history. 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 of fulfilling 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 homes. 

Home equity loans to consolidate debt 

As mentioned, homeowners can consolidate their debt with a loan from their home equity. If you’ve paid down at least 25% of your property’s value, you can access that equity and apply it toward your existing loans.  

With the help of Alpine Credits, you can access up to 75% of your home equity. Since property across Canada can have high value, they are a viable option. The process can be quicker than getting personal loans from other lenders.  

  1. Apply online—Alpine Credits makes the application process as smooth as possible. You’ll spend only a few minutes providing personal information and your house’s appraisal value. 
  2. Get approved— the approval process goes faster than traditional lenders.  
  3. Use the funds—within a few days to a week of your application, the money will be deposited into your bank account, and you can pay for your outstanding balances.  

Alpine Credits has been helping Canadian homeowners with their home equity for decades. Your property holds much 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. 

Frequently Asked Questions

For the most part, consolidation loans are a good idea because they have comparatively lower interest rates than credit cards and are more manageable.

One advantage of consolidation is that your credit score can improve. Also, some lenders don’t consider your credit score, just primarily the equity in your home 

Consolidating debt is a fair reason to get a loan. They can help you save money, taking you closer to your financial goals.  

Some consolidation loan lenders do not report to credit bureaus, so they’ll only see that your credit card charges have been repaid. Your credit score won’t decrease, but getting your score to increase means using the loan for its intended purpose.