With debt consolidation, you combine your debts or take out a loan and pay them off, leaving you with one monthly payment. Consolidating debt is a great way to help eliminate it. This not only helps you save money on interest and pay off your debts faster, but only making one payment a month can help alleviate stress.
Debt Consolidation can actually take a number of different forms, and each one has pros and cons to consider.
Here are three ways you can consolidate your debt:
Balance Transfer
If you ever get credit card offers in the mail, chances are they advertise no interest for a certain amount of time on balance transfers. Transferring credit card debt from a high interest card to a new card in order to take advantage of low or no interest is one method of consolidating debt. If you have credit card debt you’d like to pay down, this can be a great way to do it. Because 100% of your payment will be going to the principle, you can save a great deal on interest.
Be sure to read the fine print before you transfer balances. If you have a balance when the promotional period expires, most credit card companies will charge you back interest as well, which can be costly.
Debt Consolidation Loan
This type of loan consists of taking out a low interest loan and using it to pay off all your debts. Then, instead of making payments to multiple creditors, you simply make one payment towards your new loan. This is an attractive option for many because it makes it easier to manage debt and often saves money.
While this can help ease the burden of multiple forms of high interest debt, there are a few things to consider before you opt for this type of loan. Debt consolidation loans often require excellent credit and a steady income. If you’ve struggled with debt for a while, your credit may not be up to par. Many debt consolidation loans also require collateral, usually in the form of home equity. If you default on it, you could lose your home. Additionally, in some cases your monthly payment may be smaller, but the length of the loan is longer than it would have been to pay off your debts separately, leaving you with more interest payments in the long run.
Consumer Proposal
A consumer proposal is a legal agreement between you and your creditors that lets you settle your debts for less than you owe. A consumer proposal can only be prepared by a licensed insolvency trustee who negotiate a settled amount with your creditors. Then, instead of paying your creditors, you make one monthly payment to your trustee for a period of up to five years. After that, your debts are eliminated. During this time, by law creditors are not allowed to contact you.
Consumer proposals are an alternative to bankruptcy and best for people who have excessive debt they can’t handle on their own.
If you are considering debt consolidation, contact our office today. There are several different options you can consider and we will review all options with you and come up with the best solution for your situation.
