What Is a Debt Consolidation Loan and How Does It Work?
A debt consolidation loan is a debt repayment strategy. Once someone has been approved for a debt consolidation loan by a bank, credit union, or finance company, it’s used to merge multiple debts, or “consolidate” them, into a single debt. The borrower is then left with one monthly loan payment with a set interest rate.
Most often, a debt consolidation loan can only be used to pay off unsecured, high-interest debts, such as credit cards and payday loans. While it’s possible to find a lender who will include secured debt, such as a mortgage or auto loan, these types of debt tend to have comparatively low interest rates, so it wouldn’t make financial sense to include them in a Canadian debt consolidation loan.
Is a Debt Consolidation Loan Right for Me?
First, you should look at the individual interest rates you are currently being charged on your high-interest, unsecured debts. You want to make sure the debt consolidation loan has a lower interest rate than the average interest rate you are currently paying on your debts.
Next, determine if the debt consolidation loan amount is large enough to pay off all of your unsecured, high-interest debts at the same time. Otherwise, you’re still going to have multiple sources of debt and stress. You also need to be disciplined enough to avoid using the credit cards that you paid off, or you may find yourself back in debt in no time.Then you’ll have to make monthly payments on your credit cards on top of paying back the debt consolidation loan.
Does a debt consolidation loan make sense for you? Our free Debt Calculator shows you different debt repayment strategies and exactly how much money you could save in interest!