If you are in financial trouble you are not alone. In a national survey, the Financial Consumer Agency of Canada found that over 30 percent of Canadians say they have too much debt.

In Cobourg, the city council has approved a new budget that will increase the municipal levy by roughly 2 percent. While that might not seem like much, for citizens already struggling with financial hardship due to COVID-19, a 2 percent increase in expenses during this time could lead to more people in debt, especially if they were struggling to pay expenses before.

With many Canadians are facing challenges managing their debt, borrowers need to know their debt relief options. Whether it be credit card debt or debt from a personal line of credit, people experiencing crippling payments may never become debt free without help.

It is in these financial situations where debt consolidation loans could be most impactful.

What is a Debt Consolidation Loan?

Most loans are used to pay for things like a house, car, tuition or other bills.

Debt consolidation loans are used to pay off the outstanding debt of the borrower. This debt relief technique transfers debt from multiple accounts into one.

Are Debt Consolidation Loans a Good Idea?

Below are several factors to consider when deciding if a debt consolidation loan is a good idea.

Your Ability to Manage Multiple Debts

If you have multiple forms of debt that are burdensome to keep track of, a debt consolidation loan would combine them, making them easier to manage and pay.

Frequently missed or late payments hurt your credit score, and your ability to borrow at a better rate. Debt consolidation loans make managing payments easy to monitor which can help limit damage to your score.

The Rate and Total Interest You Pay

If your current debts have a higher interest than the current rate available, getting a debt consolidation loan can significantly lower your overall interest payments.

If you have equity and a good credit score you can get a debt consolidation loan at an interest rate like that of a mortgage from a bank. These are some of the lowest rates available.

Your current debts might already be at the current interest rate so this benefit may not apply to everyone.

Your Financial Situation and Credit Score

A debt consolidation loan can improve your credit score by lowering the number of lenders you owe. Debt consolidation loans are useful if you need a significant amount for money for a specific expense, like paying off debt and can commit to a long-term payment plan.

Debt consolidation loans can hurt your credit score if you can’t make the monthly payments or default on the loan.

If you only have small-scale expenses that are infrequent, then a debt consolidation loan might be too burdensome for your needs since all the requested money is given to the borrower at once.

Without collateral, you can’t take out more than $15,000 which might not be enough to cover your debts. If you secured your loan through equity, defaulting can result in the lender selling your home or car to get their money back. This is called power of sale.

Click here to learn more about power of sale and how you can stop it in some cases.

Debt Consolidation Loan vs Line of Credit

Debt Consolidation Loan Pros

  • One debt to pay and manage
  • Possibly lower interest payments
  • Improved credit score from reduced debtors and possibly from prevented payment errors
  • Less stress from managing debt

Debt Consolidation Loan Cons

  • Needs collateral for a low interest rate
  • Failure to make payments could result in losing your property
  • Without collateral, there are extra fees and higher interest to pay which might negate the benefits of debt consolidation
  • Late payments hurt your credit score
  • If you don’t meet the requirements for a bank you might need to use a private lender, without collateral, private lenders charge much higher interest than banks

Line of Credit Pros

  • Funds can be withdrawn and repaid throughout the line of credit term as needed by the borrower
  • You are only charged interest on the funds you use, giving the borrower greater financial flexibility since you don’t need to withdraw the full amount available

Line of Credit Cons

  • Interest rates fluctuate
  • Late payments hurt your credit score and cost significantly more in interest
  • Withdrawing more than 30 percent of the available credit at one time counts against your credit score

When it comes to choosing between a line of credit and a debt consolidation loan, you need to pick the choice that best helps your financial situation.

In Cobourg and throughout Ontario, the Mortgage Broker Store has been helping educate borrowers on new lending practices and different options available for tackling debt, managing payments and building wealth. Contact us today to get a free consultation with a lending advisor near you.

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