Debt Consolidation Loan
What is a Debt Consolidation Loan?
A Debt Consolidation loans is type of loan that is used for the purposes of paying off other loans. A person typically gets a debt consolidation loan in order to receive a lower overall interest. Some loans, especially department store credit cards have very high interest rates so a debt consolidation loan is an attempt to lower the interest paid. Here is an example to illustrate this point:
|Loan Type||Amount Owing||Interest Rate||Annual Interest|
|Store Card||$ 6000||29%||$ 1740|
|Credit Card||$ 7000||20%||$ 1400|
|Other loan||$ 10000||12%||$ 1200|
|Total Existing||$ 23000||$ 4340|
|New Loan||$ 23000||14%||$ 3220|
|Interest Savings||$ 1120|
In this situation, a person who gets a new debt consolidation loan at 14% would save $1120 in yearly interest charges.
Comparing a Consumer Proposal to a Debt Consolidation Loan
Impact on Amount Owing
- A debt consolidation loan does not reduce the total amount of money that you owe to your creditors. The goal of a debt consolidation loan is to reduce the annual interest that you will end up paying.
- A Consumer Proposal generally reduces the amount that you owe. Most consumer proposals reduce the total amount owed by anywhere between 50 and 70 percent.
- With a debt consolidation loan, you continue paying interest though the rate may be lower.
- With a consumer proposal, interest charges stop as soon as your proposal is accepted. You do not pay any additional interest charges.
Getting a Debt Consolidation Loan
- Lenders may consider those who have large amounts of debt a higher risk. This is especially true if you have missed payments in the past.
- Being a higher risk could result in you being unable to get a lower interest rate on your debt consolidation loan.
- A lender may require some form of security such as a second mortgage in order to accept you for the loan.
- You may need to have a family member co-sign the new loan. This means that they will be partly responsible for your debts if you end up defaulting on the loan.
- Any existing legal actions such as wage garnishment continue with a debt consolidation loan. These processes only stop if a settlement is reached with the individual creditor who is taking legal action.
- With a consumer proposal, ALL legal actions cease as soon as you file the proposal.
- With a consumer proposal, wage garnishments stop and you return to getting your full salary.
- You have the ability to pay your consumer proposal off in full or to make additional payments without penalty.
Impact on your Credit Score
- Getting a debt consolidation loan does not impact your credit score. However, if you have missed debt payments in the past, your score has already been impacted.
- Your credit score will be affected when you file a consumer proposal
If you might fall behind with payments on your debt consolidation loan, this option may not be the best choice for you. A consumer proposal may be a better option due to the additional benefits and protection that it provides.