When Does It Make Sense to Use Debt Consolidation?

Introduction

Consumer proposal, debt settlement, debt consolidation… You’re deep in debt and you’re still hesitating between the different options available to you, because you just don’t know which one would get you out of this nightmare asap.

If each of those solutions shows its own set of qualities, debt consolidation may very well be the best of the lot. However, before you go out and contact your local trustee, you need to understand all the pros and cons associated with this tool, and when it really makes sense to play that card. This is what we will cover in this presentation.

What Is It?

In essence, debt consolidation is the act of securing a loan that will be used to pay off all your other debt, usually from student loans, credit cards or other such high interest rate credit. If it all sounds easy in practice, the reality of the matter is a tad different. Even though you will truly have only one monthly payment to make instead of a half dozen, debt consolidation does come with its caveats. But before we delve into this, let's see exactly how the whole process works...

How It Works

First of all, it should be noted that debt consolidation comes in several forms which all have their own specifics. If regular DC loans work as described here above (i.e. you ask your bank or finance company to regroup all your credit under a single loan at a lower interest rate), the other options differ on a couple of critical points :

– Second Mortgage (aka Home Equity Loan): here, you will borrow money against your home so as to repay your other debt. Now, if this option does put your house at risk, should you fail to make your payments, it allows you to negotiate lower and better rates as well as deduct the interest on your taxes

How It Works

– Credit Transfer: with this way to approach debt consolidation, you will move the negative balance you have on your different credit cards on a new one. Now, how does this help you deal with your debt? Simply put, most CC companies will offer you an introductory 0% period of up to 18months. So it makes for a great choice if you can repay your debt within that time frame

– Student Loan Consolidation: this type of loan can be very interesting in that you can borrow straight from the government at preferential rates, but the downside is that the government can take the money off your wages at will in case you fail to pay your dues

When It Makes Sense

If we had to determine the perfect example where turning to debt consolidation makes total sense, it would be when you're drowning in too many payments, with interest rates so high that you just couldn't – even with all the will in the world – keep up with them.

In that case, debt consolidation might reveal to be a life saver as it can help you get your head out of the water. Also, as the only installment you'll be left with will be automatically withdrawn each month, there's no more risk of you missing a payment and suffering the dire consequences.

When It Could Not...

However, debt consolidation is far from being a panacea. When you contemplate going down that road, you need to take into account several factors to determine whether it's really worth it.

First of all, will you be able to negotiate a secured loan (meaning that you will have to put a valuable asset as collateral) or will you have to settle for an unsecured one? This is important because, if secured loans benefit from good interest rates, the same can't be said about the other option. Then, you need to consider the impact that the consolidation might have on your credit score... and, more precisely, the level of credit utilization you will achieve. If you need to use the whole amount available to you in order to repay your debt, you will see your score go down without a fail.

Conclusion

If debt consolidation was really meant for people with nowhere else to turn to and who've exhausted all venues, it might still represent a viable option for you if you're struggling with maxed out credit cards and piles of bills to pay every month.

In the end, to sort it out, it all comes down to the numbers: do the math, check whether – with the rates and length of reimbursement you can secure – you will be better off with the new loan or not. Ultimately, this is always what should dictate your decision. Facts, and nothing else.

For more information or advice on debt consolidation, get it straight from the mouth of the experts: http://www.consolidatedcredit.ca/