Handling finances has always been a sensitive affair. With too many debt accounts to look at and after, you will find yourself caught between automobile loans, education loans, personal loans, and credit card loans. High-interest rates and remembering several repayment dates will make your financial journey that much more difficult.
A debt consolidation loan! But are you unsure of its perks and drawbacks? The financial experts at Alpine Credits have come up with this amazing post to simplify all the nitty-gritty of debt consolidation for you. Visit this page to know more about debt consolidation loans in Canada.
Would Debt Consolidation Be Good For You?
Debt consolidation is highly recommended for borrowers with a clean repayment history. Keep in mind that the creditors would check whether or not your credit score has improved after you took the original loans. If you defaulted on any repayments, you might not be eligible for a debt consolidation loan.
Besides, it’s ill-advised that people with inherent financial issues like overspending or making impulse purchases go for debt consolidation loans. This is because there are high chances they will plunge themselves deeper into the debt pit after taking a debt consolidation loan simply because of their poor spending habits.
Benefits Of Going For Debt Consolidation
If you are financially responsible, you can derive a plethora of benefits from debt consolidation loans, including:
1. Eases Your Financial Journey
Managing several high-interest loans comes with considerable mental stress. You’d constantly be on the lookout for due dates, ensuring that you make timely payments. Besides, it wouldn’t be wise to pay high-interest rates for so many accounts when you have a cheaper alternative.
A debt consolidation loan demands just a single monthly payment. Not to mention, the interest rate would also be comparatively lower. Most importantly, you mitigate the chances of missing out on repayments!
2. Lower Your Rate Of Interest
In Canada, the average interest rates on personal loans vary between 15% and 45%. Besides, statistics reveal that consumer loans in Canada have been increasing in recent years. When you get a debt consolidation loan to manage these high-interest loans, you can make a substantial saving on the interest.
However, it makes sense to scrutinize the lender before finalizing your decision. Consider factors like professing fees, prepayment penalties, and other hidden expenses. Say you are not well-versed with the industry jargon. In that case, we suggest you work closely with a financial expert. Their experience in the industry will help you find a reliable lender with suitable terms.
3. Pay Off Your Debts Faster
Sure, you would be saving money on interest each month when you consolidate your debt. How about chipping in with your savings to trim down the principal amount too?
This way, you can pay off your debts faster. In the process, you can also save a few extra bucks on your interests as the principal amount would exhaust sooner. However, it would be best to work with a lender offering significantly low-interest rates.
4. Improve Your Credit Score
Generally, a new loan brings with it a slight dip in your credit score. However, taking a debt consolidation loan might actually improve your credit score. The reason is you pay off several debts like lines of credit, personal loans, education loans, and credit cards loans simultaneously. You are now responsible with your finances and closing multiple loan accounts, all of which enhance your credit score.
Cons Of Debt Consolidation
Debt consolidation is undoubtedly a lucrative prospect but consider the following drawbacks of debt consolidation loans before signing up for one:
1. Additional Costs
Choosing the wrong lender for a debt consolidation loan will prove detrimental to your finances. You might end up shelling out more on balance transfer fees, processing charges, annual costs, and closing expenses. You must have a concrete idea of the additional costs to help you zero in on the actual cost you need to pay.
2. Poor Credit Scores Lead To Higher Interest Rates
Debt consolidation would be a smart financial decision for borrowers with a high credit score. However, if you have defaulted on your payments in the past, your credit score might not look as bright as you’d like. In these situations, you might not qualify for a lower interest rate, and you may also end up with an interest rate higher than what you are currently paying. Not to mention, pre-closing charges and organizing fees will further inflate your expenses.
3. Doesn’t Solve Chronic Financial Issues
Experts recommend that people with poor money-management habits should not take a debt consolidation loan. This is because they continue to overspend and make impulse purchases. Remember, a debt consolidation loan doesn’t guarantee that you will be absolved from the financial crunch you took a debt consolidation loan for in the first place.
Simply put, the risk of missing the EMIs towards the new loan amount will always be there. Debt consolidation loans aren’t recommended for you unless you are financially responsible.
4. You Might Pay More Interest
Although a debt consolidation loan can streamline your financial journey, you might actually be paying more interest over time. Did you know that some of these loan repayment tenures might stretch up to seven years? The reason is these loans are designed to cut down your monthly EMI. However, if the loan tenure is too long, say seven to ten years, you might lose more money in the long run in the form of interest.
Consolidating your debts will be a smart decision if you are prudent enough to make the most of the situation. Be choosy when it comes to selecting a lender, as it will help you cut down your interest rate.
Professionals can help you choose the right creditor based on their experience and reputation. So, feel free to consult one unless you know what you are doing and can wrap your head around the technicalities.