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Debt consolidation Ontario

If you have debts to multiple creditors and are juggling different repayment plans, it can make it more difficult to keep on top of your repayments, which increases your risk of falling into default. That's when debt consolidation can be a useful option.

In this guide, we'll explore the concept of debt consolidation, including what a debt consolidation loan is, what types of debt can be included, and where you can get more information about using a debt consolidation program in Ontario.

What is debt consolidation?

Debt consolidation is the name given to the process of turning multiple debts, usually to different creditors, into a single monthly payment.

Rather than having to manage multiple separate debt repayments, debt consolidation allows you to roll all your debts into one repayment plan, and the money is then distributed fairly amongst your creditors.

Debt consolidation makes the debt repayment process easier to manage and, depending on the debt consolidation option you choose, may even allow you to lower the interest rate on your debts or wipe it out completely.

What's the difference between debt consolidation and debt consolidation loans?

Debt consolidation is the process of consolidating all your debts into one repayment plan, which can be done in a number of ways. One of the most common methods for consolidating debts is with a debt consolidation loan.

A debt consolidation loan is a loan that you can use to repay multiple debts. Let’s say you owe money on five different credit cards – rather than make five separate payments each month, you can take out a larger loan and make one monthly repayment, which is then used to repay your five creditors.

The most obvious advantage of using a debt consolidation loan to consolidate credit card debt in this way is that it streamlines the debt repayment process. You may also benefit from lower monthly payments if the payment term on your consolidation loan is longer than the original debts, or the interest rate is lower.

What debts can I include in a consolidation loan?

A debt consolidation loan can help you repay most types of unsecured debts, including:

  • Credit card debt
  • Payday loans
  • Utility bills
  • Medical bills
  • Other unsecured lines of credit

It’s important to note that only unsecured debts can be combined and paid off via a debt consolidation loan. If you’re looking to consolidate debt that’s secured against an asset, like late mortgage payments or rent arrears, then a other debt relief options would be more suitable.

Does debt consolidation save money?

Yes, in certain circumstances using a debt consolidation loan to repay your debts can save you thousands of dollars when compared with repaying multiple debts individually.

Not only does debt consolidation turn multiple monthly payments into one monthly payment, but certain debt consolidation programs offer loans with a very low interest rate, or no interest at all.

When you consider that repaying a credit card using the minimum payment can take over 20 years, with interest rates of around 20% APR being fairly typical, you can see how a debt consolidation loan might represent better value as a debt management program.

What are my options if I live in Ontario and want to consolidate debt?

If you live in Ontario and are considering debt consolidation as a way to help you improve your financial situation, there are several Ontario debt consolidation options for you to consider.

Consumer proposal

A consumer proposal is the most popular debt relief solution available in Canada and, while it operates differently than a debt consolidation loan, it does come with similar benefits.

A consumer proposal is a legally binding agreement between you and your creditors to repay a portion of your debts through an affordable monthly payment. Like a debt consolidation loan, it will consolidate your unsecured debt, but with the added advantage of offering you legal protection from your creditors.

The arrangement will be set up and managed by a Licensed Insolvency Trustee, a licensed debt professional who will ensure your monthly payment is divided amongst your creditors. At the end of your payment term, any remaining debt will be written off by your creditors.

To find out more about consumer proposals and debt consolidation, click here.

Debt Management Plan (DMP)

A Debt Management Plan is a debt consolidation service offered by a credit counselling agency. It allows you to consolidate debt like credit card debt and payday loans.

Like other debt consolidation services, you will make a single monthly payment towards your debts, and your credit counsellor may be able to negotiate a lower monthly payment or a reduction of your interest rate.

For more information on DMPs and debt relief, click here.

Can homeowners use property to consolidation debt?

It’s possible for homeowners to use a Home Equity Line of Credit (HELOC) as an alternative to debt consolidation loans. It’s commonly used to consolidate high-interest forms of debt like credit card debts.

In this scenario, the homeowner will take out a home equity loan from the lender, and use the equity they hold as collateral. The home equity loan will be large enough to cover all of their debt repayments, and usually comes with lower interest payments.

While this can be a useful way for homeowners to manage their debts, home equity loans also come with risks. Because it’s a secured debt, falling behind with loan payments can put your home at risk, and the lender may step in and seize the property if you continually fail to repay.

How does debt consolidation affect my credit score?

A poor credit score can make life difficult for you, especially when it comes to taking out a new line of credit like a personal loan, car loans, or a mortgage with a mainstream mortgage broker.

Debt only begins to have a negative impact on your credit score when you pay back less than you owe; if you default on your payments, for example, or make a debt settlement offer to your creditors that is less than the amount of your total debt.

The idea behind taking out a debt consolidation loan, or using another method to consolidate debt, is to help you repay your outstanding debts in full – so in theory, debt consolidation shouldn’t damage your credit score.

Where can I get reliable advice on how to become debt free?

If you’re struggling to make payments on debts to several creditors, and managing your repayments is becoming a problem, it may be worth considering ways of consolidating debt into a single monthly payment.

A debt consolidation loan could help lower your monthly payment overall, reduce the amount of money you pay as interest, and providing long-lasting debt relief that could help you improve your financial situation for the long-term.

For advice on how to get out of debt from an organization you can trust, reach out to Debt Relief Canada today.

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