No one wants to be in debt, but unforeseen circumstances often arise that sees us needing more money than we have at hand.
Two big reasons people might find themselves in debt are:
- A sudden illness – either you or a family member
One big unforeseen circumstance that is facing people all over the world and of all walks of life right now is the COVID-19 pandemic.
As the world tries to cope with the changes in lifestyle and business that efforts to control the pandemic, there has and will continue to be an increase in people needing better medical coverage and facing unemployment or a decline in their income.
As we weather the COVID-19 pandemic, many of us might need to take out a loan to help get us through these tough times.
And, post COVID-19, we might find ourselves struggling to pay back the debts that we incurred during this trying period.
Weathering the COVID-19 pandemic will stress us out enough already without having to fret about how we are going to get out of debt.
One debt relief strategy you should consider is debt consolidation. This is an especially good strategy if you have multiple loans and are struggling to make the monthly payment of each.
Wondering what debt consolidation is? Well in the simplest of terms, debt consolidation means that you take out a loan and use that one loan to pay off your other loans.
You might be wondering, what? I’m trying to pay off my debt, not get more. How does taking out a new loan solve my problems? Keep reading and we will tell you why.
Pros of debt consolidation
1. You will save money on interest
One reason that people find it hard to pay off debts is, the longer you take to pay, the higher the debt payments grow.
When you take out a loan, you agree to pay off the entire amount in monthly installments. However, loan payments also include interest rates. Because of the interest rate, your monthly payment increases by increments.
So that means, as the months go by you’re not paying the same amount every month but a little more every month.
If you have a lot of debt, these small increases in your debt payment can make it hard to stick to your repayment plan. However, when you agree to a debt consolidation program you also agree to lower interest rates.
The new loan that you take out to pay your debt through debt consolidation will have a lower interest rate than the original loans. This will allow you to budget better and pay off your loan faster.
Typically, financial institutions in Canada have an interest rate of around 14% for a secured loan, but can get as high as 30% for an unsecured loan. In contrast, debt consolidation loans usually have an interest rate of just 7-12%
2. You will only have to worry about one monthly payment
If you have multiple loans, it can be confusing and stressful to budget for each of the payments. Oftentimes these loans come with different interest rates and due dates so it can be confusing to budget and schedule.
Forgetting when your loan payment is due will make it even more difficult to pay off your debts as there are often late penalties and fees. Not only that but it will affect your credit score.
With debt consolidation, you just need to remember and pay one loan – the low interest debt consolidation loan.
Cons of debt consolidation
1. It won’t work if you have bad credit
The key to debt consolidation is to be able to get a low-interest loan that will allow you to pay off your other loans. However, if your credit is bad, you might not qualify for a low-interest loan.
2. You will need to provide collateral
A car or property like a home are common forms of collateral.
Most banks require you to provide collateral if you want to take out a debt consolidation loan. There are very few banks that will approve an unsecured debt consolidation loan. In the rare instances when a bank approves an unsecured debt consolidation loan, the loaner needs to prove that they have a high net worth or they need to get a co-signer with a high net worth and a good credit score.