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.
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.