Debt consolidation loans are loans used by borrowers to consolidate multiple, often high-interest debts into a single loan. The aim is to secure fixed interest rate, which is lower than the rate on the loans already serviced. A debt consolidation loan may lump together two or more unsecured debts into one unsecured loan. In most cases, however, financial institutions extend a secured loan, and offering collateral is required. Collateralization is beneficial in allowing lower interest rates, but borrowers risk losing the asset pledged in case of default.
This raises a concern - while the interest rate is lower, borrowers repay a considerably higher amount because of the longer term of consolidation loans. For many borrowers, their current level of debt means that they will not obtain the lowest interest rate. In addition, if they cannot offer collateral, lenders will bump up the interest rate. Combined with a longer repayment period, this type of loan can increase the total amount owed by up to 50 percent. Alternatives to debt settlement are bankruptcy, debt settlement, as well as credit counseling.
In Canada, eligible debts include debts relating to public utilities, credit cards, and other types of consumer loans. Some debts cannot be consolidated, for example, mortgage loans. Eligible candidates for a debt consolidation loan are those with a sufficient income and acceptable credit, both serving as proof that the borrower will handle debt repayment.
Credit unions, banking institutions, and caisses populaires in Canada offer debt consolidation loans
. The Bank of Montreal, for example, offers debt consolidation loans of two varieties – a personal loan plan
and a home equity loan
plan. These allow borrowers to consolidate
their credit card balances and outstanding loans into one single loan at a reduced interest rate. Borrowers who opt for a personal loan plan can choose from variable or fixed rates of interest, with repayment terms ranging from 1 to 5 years. Borrowers get an installment loan meaning that payments will be made over a fixed term. Clients of the bank who choose the home equity loan plan get an installment loan with a fixed rate of interest. They can get up to 75 percent of their home’s equity and spread the payments over a longer period of time, enjoying more manageable, lower payments. This plan is offered with a repayment period of up to 25 years.
The Royal Bank of Canada is another financial institution to check with if you are looking into debt consolidation
. Borrowers who choose this option save on interest charges and are allowed to extend the term as to lower their monthly payments. Even if borrowers opt for an extended term, they can pay more than the required minimum. By including their credit card balances, borrowers can lower the rate of interest substantially, depending on the interest rates that come with these credit cards. Finally, borrowers who secure their debt using their home equity enjoy lower interest rate. Given the appreciation in property values, this option can be a good one for some borrowers.
It should be noted that many finance companies in Canada
offer this type of loans, but they charge a higher rate of interest than mainstream lenders. Before signing the agreement, it pays to look at the fees, special terms, and interest rate as to find out how much debt consolidation
will end up costing.