Debt consolidation is the act of borrowing a new loan to pay off two or more of your current liabilities and consumer debts, including credit cards, lines of credit, pay day loans, etc. The new loan essentially combines multiple debts into a single, larger debt that requires one monthly payment instead of juggling to pay multiple creditors on differing due dates.
How Does Debt Consolidation Work?
The major benefit to a consolidation loan is the interest rate should be much lower than the rate you are paying on a credit card or pay day loan. The terms of the loan likely enable the loan to be paid off at any time without penalty. Ensure you research the full cost and details of the loan before signing any documents.
The new lender may require a co-signor or that an asset be pledged as security for the loan. I caution you to seriously consider that you are making someone else responsible to pay your debt if you should fail to make a payment. It would be advisable to speak to a Licensed Insolvency Trustee to explore other debt relief solutions before taking this step.
If you think a consolidation loan will help you to pay down your debt, contact the lending institution that you owe the most money to first. Unsuccessful attempts at borrowing funds will negatively impact your credit score, so be strategic in approaching financial institutions.
If you are successful in obtaining a consolidation loan, I recommend that you cancel the credit cards that you consolidated and refrain from incurring any other credit until the loan is paid. Cancelling credit cards could negatively impact your credit score in the short term, but will prevent you from the temptation to utilize available credit and leave you in a better financial position.
By Kathy Lenart – Insolvency Partner, Licensed Insolvency Trustee
CPA, CA, CIRP
Member and Secretary of the Ontario Association of Insolvency
and Restructuring Professionals (OAIRP)
Canadian Association of Insolvency and Restructuring Professionals (CAIRP)
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