It is very likely that you have already heard about debt consolidation. This is usually one of the first solutions that comes to people’s minds when their debt level becomes unsustainable. Yet, is debt consolidation appropriate in all cases? Not exactly…
First of all, what is a debt consolidation?
Not to mix with “debt reconciliation” or “debt constellation” (which are not real terms), debt consolidation is a loan from a financial institution that is used to pay off expensive debts (like debts of credit cards) to pay less interest.
For example, a person with $ 25,000 in credit card debt who pays 20% interest a year, or $ 5,000, could raise his or her debt in a consolidation loan at a rate of 8%. save $ 3,000 a year. It’s still considerable!
So what are the dangers of debt consolidation?
The dangers of debt consolidation are not in the numbers, as they are almost always advantageous. The dangers lie rather in the source of the problem: over-indebtedness. That is, by doing a debt consolidation, your total debt level is not reduced; only your monthly payments are. And then, now that credit cards are paid in full, there is the danger of starting to get into debt again. The problem is that, unfortunately, you can not do several consolidation loans simultaneously.
What to do, then?
First and foremost, you have to make sure that if you consolidate your debts, your budget allows you to easily make your monthly payments. If you are still tight in your budget after a consolidation, you are actually only postponing the problem, while it will be increased tenfold.
If you think debt consolidation is appropriate in your case, contact your financial institution to find out more about consolidation loans and if you are eligible.
Otherwise, if the debt consolidation is not adequate for you or if you are refused, it is better to consult a trustee about the consumer proposal. The consumer proposal will allow you to reduce your debt by making a partial repayment offer to your creditors. This way, you reduce your monthly payments and you are more likely to respect your budget. The consumer proposal is a long-term solution to get out of debt.