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Debt Consolidation Loans: Advantages and Disadvantages

Before proceeding with a debt consolidation loan, it is crucial that you understand all aspects of it. Debt consolidation loans are one of popular alternatives to bankruptcy in Canada, but they do have some disadvantages as well. Below is a list of both the advantages and disadvantages of debt consolidation loans.

Advantages of a Debt Consolidation Loan

Since with a debt consolidation loan you only have one payment instead of many, there is a reduced risk of being late on monthly payments.

In addition, with multiple payments debtors often rack up a substantial amount of interest when they are unable to pay off each individual debt – whereas with a debt consolidation loan there is just one easy payment, so interest rates will likely be reduced each month.

With a debt consolidation loan, you can pay off all of your credit cards at the same time and reduce the high interest you pay on credit card debt: debt consolidation loan interest rates tend to be lower than credit card rates, so you save money and pay off your debts faster.

Does debt consolidation hurt your credit

There will be no negative effects on your credit rating if you make all of your monthly payments on your debt consolidation loan. In fact, since you have reduced your interest payments, it is possible that your credit rating will actually improve as a result of your new debt consolidation loan.

Disadvantages of a Debt Consolidation Loan

  • To qualify for a debt consolidation loan, you may be required to give some form of collateral. This may mean a second mortgage on your house, or a lien against your car or household furnishings. If you are unable to make your loan payments, you risk losing your car, home, or household goods.
  • Even though you could potentially save with a reduced interest rate, combining of your old debts into one debt consolidation loan will still leave you with a large monthly payment. If you had trouble making your payments on three or four small loans, you may still have trouble paying on one large loan.
  • If you continue to have access to your old credit cards, and you are not careful, you may fall even further into debt.

If you owe more than you can handle, a debt consolidation loan is an option definitely worth considering. Remember, however, that you have other options as well, such as credit counseling, a consumer proposal, or bankruptcy, so we suggest you review all of your options and then decide which option is right for you.

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