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.

Interest Charges

  • 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.

Legal Action

  • 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.

Early Payment

  • 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.



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