How to Know When a Consolidation Loan Is Your Best Option (Video)Aug 16, 2017
If you’re finding out how to reduce debt, looking at the options available can be overwhelming at first. Depending on the debts you carry, you could make extra payments toward your balance, pursue credit counselling, or resort to something more formal in filing a consumer proposal or bankruptcy. For Canadians with multiple debts, a debt consolidation loan can be a starting point to making those debt payments more manageable.
In Newfoundland & Labrador, the average person carries $23,363 in consumer, non-mortgage debt — a trend pushed higher by a minority of people who are adding to their debt in large amounts. The average debt in Newfoundland is higher the national average of $22,081. A rise in debt from auto loans and installment loans have been pegged as part of the problem.
When you’re carrying multiple debts with varying levels of interest, consolidating it can accomplish a couple of things. Consolidation makes it easier to make debt payments every month — you have just one payment to keep track of. It also can potentially lower the interest on your debts; where credit card debt may have interest of 18-19 per cent, a consolidation loan could be as low as 7 or 8 per cent.
Getting a consolidation loan, though, isn’t always as easy as heading in to any lending institution and signing up. There are considerations to be made ahead of time, ensuring that you get the loan that’s best for you.
The differences between consolidation loans include:
- Interest rate. You should be able to get a lower interest rate that what you pay on your current debts, like the example above. Look around for what you can get, and make sure you read your contract to ensure the rate is fixed over the life of the loan.
- Risk. Typically, a consolidation loan comes from either home equity or a personal loan. While the equity loan can put your house at risk, the interest rate will likely be a lot lower than a personal loan.
- Term. Longer terms mean lower monthly payments, but your goal should be to make your repayment period as short as possible. Do some number-crunching to figure out your preferred monthly payment before you sign a loan.
These considerations should be made as you “shop around” for your consolidation loan. Visit multiple lending institutions, see what you can qualify for, and make a well-informed decision before signing up.