Regardless of how sensible you are with your spending habits, most of us get into some kind of debt at least once in our lives. Once you land up in a debt cycle, it can sometimes be tough to find a way out of what seems like a trap. It can also lead to significant consequences, such as poorer quality of life and less-than-ideal credit history.
However, even in this kind of situation, there are several strategies that you might be able to utilize to resolve your debt problems, such as debt consolidation through home equity financing. Established organizations such as Alpine Credits can immensely help you process such loans. If you are looking for debt consolidation in Brampton, you can visit alpinecredits.ca.
However, before you apply for one, knowing the benefits and drawbacks of debt consolidation in and out makes sense. It's easy to get carried away by myths people habitually hold when consolidating your debts. This article will delve into the truths about debt consolidation and help you make a calculated move when applying for such loans.
What is debt consolidation?
Simply put, debt consolidation refers to a financial manoeuver through which you can combine several high-interest loans into a single account with a lower interest rate. Different financial institutions evaluate your profile and determine the type of debt consolidation loan that would suit you. Some of these instruments include personal loans, home equity loans, and HELOCs (home equity line of credits).
Therefore, you need not make separate payments to settle each loan account once you consolidate them. Instead, you'll only need to worry about one single monthly payment. This removes the hassle of remembering several payment dates every month and makes it much easier to repay your loans.
Common myths about debt consolidation
There are several common myths about debt consolidation that might have you thinking twice about selecting this option for resolving your financial issues. Let's go over them to get a transparent view of the process and make an informed decision without any misinformation.
Debt consolidation hurts your credit score
When you take out any sort of loan, it does affect your credit score - this much is true. However, this dip in credit score is temporary - once you start making timely repayments, your credit score will recover quite quickly and start to trend higher over time as you display good repayment habits. Moreover, when you consolidate several loan accounts into a single comprehensive one, you're also able to boost your credit score in the long run.
However, a debt consolidation loan might hurt your credit score if going through traditional avenues. If any of the agents inquire about your history on your behalf, it will reflect in your credit score for a few years as a hard inquiry. Credit bureaus may also consider the act of looking for debt forgiveness to be a sign of poor financial standing, which can also drop your credit score.
To improve your credit utilization ratio, it would be advisable to seek debt consolidation through alternate means, such as home equity financing.
You'll have to deal with lower interest rates after traditional debt consolidation
Typically, the objective of consolidating your debt is to lower your interest rates while reducing the number of loan accounts. However, not every borrower has a good credit history they can use to qualify for a low-interest loan. Moreover, your debt-to-income ratio is likely not enough to get a reasonable interest rate if you're turning to traditional debt consolidation.
Applying for debt consolidation to have an agency negotiate with debtors while having a poor credit record might not be very effective. You will still pay a significant interest rate on your outstanding amount, and pay even more fees to the agency for helping you come to this arrangement.
This is another reason why it's smarter to consolidate debt through a home equity loan or HELOC, which would virtually serve the same purpose while getting you a much more competitive interest rate.
All debt consolidation plans work the same way
Debt consolidation is a broad concept that can make use of several different approaches to combine multiple loans. As a borrower, you might have the misconception that an agency will help you write off a portion of your owed amounts or that a bank or financial institution will process a sizable loan to help you pay your current debts. However, you might receive different recommendations from financial experts on the best way to consolidate your debt, depending on your financial records and spending habits.
Line of credit or personal loans
Some established banks, credit unions, and private lenders take on your debts and pay them off. In return, they require you to make a single payment each month. However, you can qualify for a lower rate of interest in case you decide to go with a line of credit. For this, you should have a strong credit score or get approval by presenting collateral or guarantor.
- Credit card balance transfer
You might have some credit cards that offer balance transfer loans at a lower interest rate. So, you have the provision of moving your current balances of the credit cards into one cad. However, these offers are available only temporarily. If you manage to apply for the balance transfer on time, you can pay off the debts at a lower interest rate before the higher rate kicks in.
If you have paid off most of your mortgage or own your home, you can enjoy access to HELOC (Home Equity Line of Credit). Thus, you can tap the value of your property and obtain a loan at a reasonably low-interest rate. Particularly, when you compare this rate to credit card interest rates, they turn out to be much lower.
Debt consolidation is not just about eliminating your debts - it's a process that helps streamline your finances. It can help you figure out the best approach to your payments while keeping them manageable with your current income. And with the right lender and plan, you might even be able to get a lower interest to make the repayment process much easier.