If you have borrowing capacity, and can reduce the interest you are paying, getting an unsecured debt consolidation loan may be a good debt relief option and allow you to pay off your debts sooner.
For example, if you have $20,000 in credit card debts carrying an 18.5% interest rate, and if you own a $150,000 house with a $80,000 mortgage, it may be possible to get a second mortgage from a debt consolidation lender for $20,000 to pay off your credit cards. The second mortgage may only carry an interest rate of 9% or 10%, depending on your credit rating.
Disadvantage of Debt Consolidation
A debt consolidation loan is not however always the best option.
- you debt consolidation lender may require collateral to grant you a loan such as equity in your home, a car or perhaps a co-signer. If you do not have any assets you may not be eligible for an unsecured debt consolidation loan.
- an unsecured debt consolidation loan can still be a high interest loan compared to other options
- if your consolidated payment is still higher than you can afford, you may default on your new consolidation loan and harm your credit rating even further
- if you do not cancel your old credit cards, you may be tempted to use them again and run up even more debt.
If you need help reducing your debt but don’t feel that a debt consolidation loan is a good alternative for you, you still have options. We recommend you contact a debt expert to find out if credit counselling, a consumer proposal or perhaps even bankruptcy is right for you.