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Debt Consolidation Loans
None of us likes debt, yet some how we consciously or unconsciously pile up loads of debt from different lenders. A major problem with this diversity of loan sources is that it usually makes paying them off a lot harder. Dividing your meagre funds over several credit cards, loans and different debts makes it less effective in paying off the loan and that can be stressful and depressing.The thought of a debt consolidation can make you sigh and grumble and maybe utter some expletives under your breath, or say: ‘Isn’t that just another disguised loan that is going to make paying off your debt even harder?’ Maybe not! We already stated that the problem with having a loan from so many places is the scattered nature of the various loan repayments.
Therefore, the first step to getting to grips with your loans is to consolidate them. Basically, this means gathering them together in one place to make it easier to track and ultimately repay them. An easy way of consolidating your loans is to get debt consolidation services providers like AfterLoans
Why Should I get a Debt Consolidation Loan?
If debt consolidation is that easy and makes loan repayment easier, why not everyone with different kinds of debt consolidate their loans? The truth is, not many people are aware that getting debt consolidation loans can help them to manage their debts better.
To make a debt consolidation loan work for you, you need a loan large enough to pay off all your existing unsecured debts with a monthly repayment amount small enough to make it comfortable for you to pay the loan over a certain period.
The debt consolidation loan is used to pay your debts off from that single loan. You now only have one payment to make to one lender, rather than making several payments to many different lenders.
There are two advantages to merging your loans into one consolidated loan. Firstly, in most cases it allows you to lower your monthly payments. Secondly, the lower payments can mean more money in your pocket at the end of the month. You can then use this extra money to pay some of your other bills or treat yourself or your family to a nice meal in a nice restaurant every now and then or use it to pay off part of the consolidated loan.
Debt Consolidation Loan Can Prevent bankruptcy
Take the case of Mary. Mary is a regular administrative assistant in a school. She makes about $20 an hour from her job. She is a single mother of 3, meaning her expenditure is on the high side. She owns 4 credit cards with interest rates of 16%, 15.3%, 19.3% and 14.5. In addition, she also has a mortgage and other smaller loans from her church, school and friends. So many loans, in from many different places.
Keeping track of her debt gives Mary a constant migraine and that’s understandable. Mary is paying off a collective interest rate of over 30% when she could have paid an interest of a little over 20% for a consolidated loan.
Now, it must be said that it is not always the case that you will get a low interest rate from a lender of consolidated loans, but invariably, you will end up paying a lower interest rate for a consolidated loan. In Mary’s case, even if she ends up with a high interest debt consolidation loan, the actual interest she will pay will be lower than the collective interest rate she is paying.
Applying for a Debt Consolidation Loan
Getting a debt consolidation loan can be difficult if a person has a poor or bad credit history and therefore do not pass a credit check. Financial institutions like banks will not grant a debt consolidation loan to a borrower with a bad credit history. Therefore, in the case of Mary above, she will find it difficult to get a loan for debt consolidation from a bank if she has a poor credit history. On the other hand, if she has a good credit history she can get a loan at a lower interest rate from a bank. This will help to lower her monthly payment and the overall interest rate.
If Mary has a poor credit history, she can still get a loan to consolidate her debt, except that the loan will not be form a bank but rather from a private lender or an alternative financial institution. The truth is that most people in Mary’s position do not usually qualify for a loan from a bank. It is always the case that most people struggling with debt also have bad credit history. Fortunately, there are many alternative lenders and private lenders in Canada that offer what is called bad credit loans.
Bad credit loans are loans given to people with bad credit. People with bad credit history are considered risky to lend to. Because of this bad credit loan lenders charge a higher interest rate for the loan. Therefore, if Mary has bad credit, the debt consolidation loan will be at a higher rate of interest, higher than what the regular banks charge.
Higher interest rate notwithstanding, Mary will still be better off having a debt consolidation loan, rather than having to make many payments to different lenders each month.
Assessing Your Reason for Getting a Debt Consolidation Loan
Before applying for a debt consolidation loan, a person will need to assess her/his decision to take a debt consolidation loan intently. They may want to ask themselves if it is worth taking the loan. The reason for considering taking a loan is that the person feels overrun by debt and wants to improve her debt situation. That purpose will be defeated if after acquiring the loan, the money is used on other things rather than using it to pay for the various loans.
Be aware that even though a debt consolidation loan may free up more monthly cash for you, over a long repayment term, that loan can end up costing you more than what your former separate debts cost.
Debt Consolidation Programme
Another way of dealing with multiple debts is through a debt consolidation programme. To help Mary, in our example above deal with her money problems, she may be encouraged to enrol in a debt consolidation Programme. By enrolling in a debt consolidation programme, she will be helped to manage her money better to get out of debt.
Debt consolidation programmes are run by debt management companies which charge a fee for helping you to consolidate your debt. Their job may involve making arrangement with all your different lenders and making arrangement to make just one payment to them each month. They will intend arrange for your creditors to receive the monthly payments agreed in the arrangement.
A debt consolidation programme involves debt counselling and combining all unsecured debt into one and then make plans to make one single payment each month. The program also involves educating people on how to manage their funds better. In the case of Mary all her debts will be brought into the program under one consolidated payment. The debt to be consolidated will include all her unsecured debts and any other debt that doesn’t require collateral. This means her mortgage loans will not be included in the program.
By coming into the program, the debtor will be helped to 1. Come up with a personal monthly budget and stick to it. No more spontaneous purchases or unneeded treats. 2. Track and control spending. 3. Set SMART financial goals. 4. Learn to make her money work for her.
Debt Consolidation Programme Versus Debt Consolidation Loan
Though a consolidation programme looks like a consolidation loan, there is a difference. As mentioned earlier, with debt consolidation programme all your unsecured debt is combined into one consolidated debt package. The program does not involve a loan. It is an arrangement by a qualified credit counsellor to who will with your lenders to help clear all your personal debts through a single monthly payment you can afford.
A debtor will benefit by enrolling in a consolidation programme as she will be able to settle her debt in a shorter time as compared to paying off a consolidated loan. Beyond that, she will learn new money practices that may positively affect her views on money and debt for the rest of her life.
Your circumstances will determine whether you go for debt consolidation loan or for a debt consolidation program. However, it is worth considering the benefits of both to you before making a final decision on the plan to go for.
Other Types of Debt Consolidation Loans
There are different types of debt consolidation loans available for individuals. Here is a list of three of these.
Home Equity Loans for Debt Consolidation
This kind of loan involves taking a loan while using your home as collateral. To qualify for this kind of loan, you will need an amount of equity in your home as well as a good credit score. Though interest rates on this type of loans are lower, there is a downside to putting your home on the line due to a debt.
If you put your house on the line and you are not able to make the regular monthly payments, you could lose your home. It is not a good idea to turn an unsecured loan into a secured loan and put your home at risk. If you need a debt consolidation loan get and unsecured debt consolidation loans.
Credit Card Balance Transfers
With this type of loan, your home isn’t put on the line. Just as the name implies, with a credit card balance transfer, you move your credit and balances onto a single credit card. Ideally, whichever credit card you select must have a lower interest rate. To be able to use this kind of loan as a debt consolidation loan, you will need a credit card with a large limit which can hold all your consolidated credit and debt.
This loan seems all rosy till you realise that a major downside is that it literally butchers your credit score. Placing too much debt on one credit card could have a negative impact on your credit score as your credit utilization increases. However, once you pay down the balance your credit score will bounce back.
A large personal loan can also serve as a consolidation loan to settle all your debt. A personal loan is an unsecured loan that has fixed payments over a period. Once your application for a personal loan is approved, you can use it to consolidate your debts. However, getting approval for a personal loan for consolidation purposes might be difficult since your credit rating might have already dropped due to your existing debt.
Nevertheless, you can get approved for a loan from a bad credit lender, albeit at a higher interest rate because of your bad credit history. You will need to be carful here because a personal loan may do more harm than good mainly because you will be paying off the loan for a long while and not saving much.
Robbing Peter to Pay Paul
The harsh truth about any type of debt consolidation loan is that you are basically robbing Peter to pay Paul. You are not really getting rid of debt. All you are doing is shuffling debt around to make it easier for you to manage your debt. Because of just one debt, lower payments and the spare cash that you get at the end of each month (due to the lower payments), you may feel tempted to think you have less debt, so you could borrow some more. Don’t fall for this.
To be truly out of debt, in addition to any deb consolidation loan you may take or a debt consolidation program you may get into, you will need to take practical steps to change your attitude towards acquiring more debt and controlling your finances better.
Becoming Debt Free
There is a popular saying that prevention is better than cure. In this sense, you will be better of knowing how to avoid getting into debt in the first place. Our present actions play a large part in whether we get into debt or not.
We’ve spoken so much about how to pay off debts. Now let’s talk about preventing the whole debt problem in the first place. Let’s assume you own one, two or even three credit cards or even more. Let’s see how you can manage your debts built up on these credit cards.
It’s no secret that credit card interest rates are continuously increasing. This simply means, the more credit cards you own, the more you pay in monthly repayments and interest. The first secret to being debt free is to bring out all your cards and lay them neatly before you. After laying your cards out, identify which ones have the highest interest rates and balances.
Now that you’ve identified which of your credit cards are essentially costing you the most, you will need to put them away and stop using them. Begin a monthly budget plan to pay off the cards, starting with the expensive cards first. Creating and implementing a monthly budget gives you a bird’s eye view of how much money is coming in versus how much is going out. With this information, you can monitor your expenses, know which ones to cut out and start a plan to pay off your debt. Be disciplined about your money and you will be fine.
Here Are 5 Signs You’re Running Straight in to The Ditch of Money Problems.
It helps to know if a course of action will land you in deeper waters of debt. Below are five things you should watch out for if you are ever going to prevent yourself from getting into debt or getting out of debt.
You Don’t Pay Cash for Anything Anymore
When you get a credit card with a fat balance on it, you might feel that you have a lot of money at your disposal to spend on anything you want. While this is true, you must remember that you will have to pay for the credit card at the end of the month.
You don’t save to buy anything anymore.
Once you see anything that piques your fancy, you swipe your card and pay in full. This is a clear sign that you are heading straight in to some big debts. Every swipe of your credit card may just be an extra step to financial ‘bondage’.
Getting a credit card doesn’t mean you should ditch your old way of acquiring stuff. Before your credit card, you perhaps used to save over a period to purchase items you needed. Lately, you don’t seem to be doing that. Just because you obtained a credit card doesn’t mean you should stop saving for the little things.
Granted, it is very convenient to use a credit card for purchases but using your credit card without control can put you into some serious debt. If you don’t pay off all your credit card balance at the end of each month that will surely put you in debt. Control your spending and you will be just fine.
You Don’t Say No to Unnecessary Expenditure
Your new favourite line during an outing with your friends is ‘All drinks on me.’ Mainly because you have an image to uphold. You need to learn how to choose what you spend your money on. That starts with you being honest with yourself. If a decision doesn’t fit, recognise that and act to prevent it. Basically, learn to say no to expenses that you don’t have to make.
You Have No Clear Financial Goals for The Future
What’s the difference between you now and you next year? How much money would you want to have in your bank account? What will you want to accomplish in the next 5 years? Write down your goals and the ways you want to achieve them. If you have a clear-cut goal and how you want to save money and spend money, you can control your earnings and your expenditure. Once you stop seeing the future you stop and working towards that, you may be slowly heading towards some form of financial crisis.
Not Acquiring Financial Literacy
A key way to being debt free is learning and knowing how to make money and control your expenditure. Do not say you are not good at managing money and make yourself accept your situation. Learn how to be good with money. Join a financial literacy class if necessary.
6 Ways to Save Money To Pay off Debt
Now that you’ve learnt how to be debt free. How about saving some more money to pay off your debt and keep you out of debt completely? Here are five simple and creative ways to save money.
Use Public Transport
Everybody loves their car. The car has really become an integral part of our lives which most people can’t do without. However, it can be rather expensive running a car. Consider the cost of gas, maintenance and monthly car payments. Also consider the cost of parking tickets when in town, not to mention parking fines for violation of parking rules. Ask yourself if you really need to take your car everywhere especially if there is a cheaper alternative in the form of a public transport.
Walking is better for you. It won’t just help you save money but also help you to keep fit. So next time you need to run an errand which is not so far off, walk or grab a bicycle. You will save money and keep healthy at the same time.
Slash Your Phone Plan in half
How about shopping around for a cheaper phone plan so you don’t need to pump more cash into paying for your phone and data? Did you know slashing your phone bill by $5 a month will save you 120 over a 2-year contract. It’s interesting and shocking how much money we put into paying for our phones and internet bundles.
Cancel Unneeded Subscriptions
Check how many subscriptions you have and cancel those you don’t really need: gym class, dance class, magazine subscriptions and so on. For each of these subscriptions you get small deductions every month which add up to one big deduction. How about cancelling subscriptions you really don’t need?
Sell Unused Items Online
Got unused gear or baby clothes your children have outgrown? Why not sell them online to make some extra money? Think twice about disposing items in your garage or attic. You may just gain a small fortune from selling one of these ‘unneeded items.’
Buy Generic Items
You don’t need to always purchase branded items. There are cheaper alternatives that offer almost the same experience, product or service. You could save up to 25 percent on your grocery bill by purchasing a cheaper alternative which is equally good. Applying this rationale to purchasing anything helps you save more.
3 Ways to Pay off Your Debt
After you save some money and have finally decided to pay off your debt. Here are three ways by which you can do that.
Snowball Effect Method
This method involves starting slowly with smaller amount and then building up to bigger payments. You know how snowballs start right? From a tiny ball of ice which grows by gathering more ice. With the snowball approach of paying off your loans, you pay off or settle the smallest debts first regardless of the interest rates.
This isn’t done in isolation though, you will still need to make minimum payments on your other cards to reduce your debt there too to avoid defaulting on those debts. Any default will affect your credit rating and will make your debt situation worse.
Once you’re done settling the first small debt, you move onto the next smallest debt and proceed in the same manner. You should opt for this method if you want to eliminate some cards quickly and be motivated to continue. Paying the smallest debt means one less phone call from debt collectors. It does not matter the size of the debt; debt collectors will call you. Therefore, by paying off even the smallest amount that you owe to one lender, you get a relief from unwanted phone calls from debt collectors.
Avalanche Effect Method
This method is the opposite of the snowball method. While you start small with the snowball method of paying off your debt, with the avalanche method you start with the biggest debt that you owe to a lender. However, you focus on paying the card with the highest interest rate first, again while maintaining your minimum payments on your other cards.
Once you are done settling one big debt, you move to the next big debt and so on. This method doesn’t readily give you instant gratification, however, it’s still worth it. Whether you choose the snowball method, or the avalanche method will depend on your finances and your situation. Both the snowball and avalanche methods are popular, but both have their advantages and disadvantages.
For example, starting with the avalanche method means you will have to make larger payments on the debt. This will help clear the bigger debts first and faster but can leave you with less cash in your pocket and you mat struggle a bit. However, the relief you get from paying off your debt is worth the initial pain of making the payments.
The snowball effect method on the other hand takes a gentler approach and therefore less stressful. The downside to it is that you don’t pay your debts quickly enough.
Which method you choose will come down to your own personal finances and situation, and to an extent, your personality and attitude to debt.
Debt Consolidation Programme
We discussed debt consolidation program earlier on in the article. However, we are mentioning it here again to show how that can be used to pay off all your unsecured debts. As mentioned before, a debt consolidation programme involves combining all your unsecured debt into one and making plans to make one single payment every month.
This means you can settle on a comfortable amount to be paid each month to clear your debt. Because all the debt is now in one basket, you don’t choose to pay those with high interest first or those with smaller amounts outstanding. You simply make just one payment which is then distributed among all your creditors. You can choose to pay the loan faster by agreeing to pay a larger amount each month.
This method doesn’t come with a debt consolidation loan; however, it provides a plan for paying off consolidated creditors in minimum monthly installments and at the best rates.
Disclaimer: All loans offered through this website are subject to credit and underwriting approval. AfterLoans.ca is a lead referral company, not a lender. AfterLoans only works with financial service providers that adhere to Canadian laws and regulations. Our lenders lend from $500-$5,000. Loans amortization is between 6-36 months. APRs range from 19.99% to 55%. The actual APR charged will depend on the lender’s assessment of your credit profile. For example, on a $1000 loan borrowed for 12 months at 29.9%, the monthly payment will be $97.24; with a total repayment, including interest, of $1166.88 There is also lender’s optional loan protection policy. In the event of a missed payment an insufficient funds fee of around 45$ may be charged (dependent on the lender). If you default on your loan payment plan the lender may terminate the plan and the remaining balance will become payable immediately. Our lenders employ fair debt collection practices, but will pursue the payment of Outstanding debts to the full extent that Canadian law allows.