Some people and companies say that consolidating your debt is the best thing you can do when getting out of debt. However debt consolidation in Brampton has many pros’ and cons’, that need to be taken into consideration before you go through the process of consolidation, if you don’t want to get some nasty surprises.
Types of Debt Consolidation
There are a four main types of debt consolidation plans available depending on certain factors.
The first is a debt consolidation loan. This is done through a bank or credit union, and is designed wholly around your debt, taking into account how much money you owe, who you owe it to, and if you can afford to meet the monthly payments while still paying for the necessities of life. Typically the bank will pay your creditors directly and from that point on you will pay the bank.
For home owners a home equity loan, commonly called a second mortgage is an option. This usually gives you more money above and beyond your current debt, and lets you have more control over how you consolidate your debt. It also typically offers the lowest interest rate compared to all other methods. The danger here, is if you don’t make your payments you could lose your house.
A third method is a loan or line of of credit from a bank, credit union or an installment loan lender. This is less risky than using your house as collateral, but interest rates tend to be higher, there are more upfront and hidden fees, and you need a good credit rating.
The final method is to transfer your credit card debt to a low or zero interest credit card. This is only good for credit card debt, and often the low interest rate is for a limited time only. However if you’re currently paying off five credit cards all at high rates of interest, this is a nice option especially if you can pay it off quickly.
Advantages of Debt Consolidation
When you get the right type of debt consolidation, there are several advantages.
First, instead of juggling multiple payments each month, you only have a single payment. This makes things simpler for you, as you can plan your budget more easily in advance, and there shouldn’t be any surprises.
Second, your debt consolidation should have a lower interest rate than most or all of your previous debts. If this isn’t the case, you have gotten a bad loan, and one reason you should seriously consider getting a credit counsellor before arranging for consolidating your debt. The lower interest rates means you save money every month that would normally go to just paying down your interest.
Third, it will help your credit rating. Paying off numerous small debts looks good. It won’t change your credit rating overnight, but it’s a step in the right direction and if you keep up with your payments for a few months, things will become easier for you. Also unlike several other ways to get out of debt, debt consolidation is a negative influence on your credit rating.
Fourth, if you go through a bank for debt consolidation loan, the bank will deal with your creditors for you, ensuring you resist the temptation of spending the money on anything other than paying off your debt.
Disadvantages of Debt Consolidation
First, you don’t actually remove the debt. You still have to pay every penny back of the money you owe, plus the interest, and there could be some extra fees involved. If you don’t pay the money back you will simply end up deeper in debt with even less leeway.
Second, a bad debt consolidation loan will cost you more in the long run. If you don’t get a low interest rate on your loan or credit card, you will at best break even, but probably end up paying more because of the large amount of debt that you owe.
Third, if your credit rating is not good enough, you may require a co-signor or collateral, putting your house, car or something else of considerable value at risk if you can’t keep up with the payments.
Fourth, if you keep all of your credit cards and use them like you did before, you will simply be kicking the can down the road, and in a few months you’ll still owe your previous debt plus all of the new credit card debt on top of it.
Debt Consolidation in Brampton
If you are in debt, especially credit card debt, debt consolidation is a very good option. However you do have to be careful and do your homework before jumping in blindly. So when you start looking at your options for debt consolidation in Brampton, seriously consider talking to a credit counsellor to make sure you are not only eligible, but also that it’s the right option for you.