What is debt consolidation & how does it work?
Have you been juggling debt payments and feel like there’s no end in sight? If this sounds like you, you may be wondering: What is debt consolidation, and how does debt consolidation work?
Debt consolidation is a way for a person dealing with multiple loans and high interest rates to regain control of their financial situation by funnelling their various debt payments into one, often at a lower interest rate.
Consolidating your debt might be just what you need to get your finances back on track and make your payments more manageable. If you are wondering if debt consolidation is right for you, visit our debt consolidation page to learn more.
What is debt consolidation?
Debt consolidation involves merging two or more of your existing debts into one larger loan that typically offers lower interest rates or a lower payment amount each month.
People who choose to consolidate their debt often do so because it makes their payments easier to manage, and they tend to accumulate less interest each month than they would with multiple loans. As a result, it may be possible for them to pay off their debt sooner.
How does debt consolidation work?
If you have recently taken on a lot of debt and your monthly interest is starting to pile up, you may be asking yourself: How does debt consolidation work in Canada?
Canadians who choose to consolidate their debt have several options to choose from, including credit card loans, lines of credit, and home equity loans.
When deciding how to consolidate your debt, it’s important to remember that each person’s financial situation is unique. Understanding the various options can help in making an informed decision as to which debt consolidation route is best suited for you.
What is a consolidation loan?
A consolidation loan could be a secured or unsecured loan.
A secured loan is when a borrower uses an asset as collateral to secure the loan. An unsecured loan, on the other hand, requires a borrower to meet certain criteria pertaining to their credit.
An unsecured loan relies heavily on the borrower’s credit score, which means these loans are often more difficult to get approved for. However, if a borrower defaults on an unsecured loan payment, they are not at risk of losing an asset, as they would be with a secured loan.
Here are some common types of debt consolidation loans.
Credit card loan
People experiencing high credit card debt may choose to consolidate their debt through a credit card loan. This process involves using a new credit card to pay off the remaining debts of old credit cards, often at a lower interest rate.
While this may sound like an efficient option for those with credit card debt, it’s important for borrowers to take the time to read the fine print before agreeing to this type of loan, as there are often certain limitations that borrowers may not be aware of, such as a temporary low interest rate that increases with time.
Line of credit
Taking out a line of credit is another common option for people looking to consolidate their debt. With a line of credit, borrowers can get approved for a certain amount and can take out money at any time to pay off existing debts.
They then pay back the line of credit in regular installments, typically with a lower interest rate. However, it’s important to note that without an excellent credit score, it may be challenging to get approved for a line of credit.
Home equity loan
With a home equity loan, you can forget any worries about being approved for a debt consolidation loan based on your age, credit score, or income history.
If choosing a home equity loan, the professionals at Alpine Credits understand your situation is unique and can help you reduce your monthly payments by up to two-thirds by working with you to merge your current debts into one easy-to-manage loan with favorable terms and a better interest rate.
So, how do debt consolidation loans work?
After obtaining a debt consolidation loan, the borrower is responsible for making regular payments consisting of principal and interest amounts 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.
Remember that defaulting on an unsecured loan payment can result in other consequences, such as having to deal with collection agencies.
Alpine Credits is the best alternative to banks for debt consolidation
When it comes to consolidating your debt, using a bank or credit union may sound like the right move, but these options are not for everyone. If you have a lower credit score, higher debt amounts, or a poor credit history, It can be hard to get a loan with reasonable terms.
Luckily, Alpine Credits offers a more efficient alternative to the bank for loan approvals. All you need to do is own your home—or another piece of real estate—to qualify. With less strict criteria, your debt consolidation loan can be approved fast so you can focus on taking control of your finances and repaying your debts.
Have more questions about debt consolidation?
Hopefully, we’ve been able to clearly answer the question of how debt consolidation works.
For more information about debt consolidation for your unique situation, contact us today at Alpine Credits and get expert advice from our professionals. We have years of experience and can help you get the answers you need. Call us today at 1-800-587-2161 to get started.