Some Advantages and Risks of Debt Consolidation in Canada

Debt consolidation in Canada is one of the most effective method for managing and reducing debt. Thousands of Canadians have consolidated their debt and successfully reduced them to a manageable level or even eliminated them altogether using this method that they have become debt free.

Debt consolidation has many advantages:

• It can help lessen monthly payments as you are left with a small number of bills or ideally only have one bill left to pay.
• It can reduce your interest charges as you consolidate the higher interest loans and pay them all up and have only the low interest ones left to pay up.
• It can help you manage your payments in a timely manner and prevent you from making payments late.
• A consolidation will allow you to keep up with payments and prevent creditors from harassing you or pursuing legal action.
• It can help you get your debts in manageable level and get your finances back on track.
• It’s a great tool that you can use to help you repair and build your credit.

As there are advantages there are also risks when consolidating debt. Some risks to be careful about include:

• It can mislead you into thinking that you automatically get rid of all your debt. The truth is that you are only transferring multiple debts into one consolidation loan. Your debt levels are in no way reduced. In the end, you will still need to pay back the same amount of money you owe.
• With the mistaken notion that you have paid up your debts, you could end up falling into the same bad spending habits that put you into debt in the first place, thus causing you to fall even deeper into debt and making your problems worse.
• There is a possibility that the new loan will have higher interest costs, in particular if you lengthen the payment period. If you take longer to pay the new loan, this will result in more interest charges and you end up paying more on the total debt because of the added interest.
• There is a big risk of losing your assets, in particular if you use a type of consolidation that requires you to provide collateral. An example is a home equity loan. Banks and finance institutions allow you to take on a second mortgage based on the value of equity you have on the property. If you default in making payments, you could potentially lose your home.

There is no doubt that a debt consolidation in Canada can help in managing debt. If done effectively using the right type of consolidation and making sure that you can afford to make the monthly payments on time, this method can help you get rid of many of your debts and let you get back on track financially. However, it is not a method that can be applicable to everyone. Every person’s debt situation is different, and the solution will depend on each unique circumstances. It is important that you are informed of other options that may work for your situation. The best step is to seek advice from someone who is knowledgeable about dealing with debt problems. A certified credit counsellor, or better yet, a licensed insolvency trustee can explain the advantages and risks of each debt relief program and can properly guide you to decide on the best method for you.