How does credit consolidation work?

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Thinking of credit consolidation to tackle your debts? It’s a strategic move, like tidying up your closet without discarding anything. A fresh loan might help you enjoy lower interest rates. Alternatively, Debt Consolidation Programs from non-profit counselors negotiate better deals, lightening your financial load. Consider a consumer proposal with a Licensed Insolvency Trustee for deeper cuts in debt, but be cautious—trustworthiness varies. Reach out if you have questions.

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Credit Consolidation Question

How does credit consolidation work? A cousin mentioned credit consolidation, but I don’t really understand if they pay off my debts for me or if I still owe the same money, so I need more details.

From: Anonymous Question
Location: Moncton, New Brunswick (NB)
Category: debt consolidation

Credit Consolidation Answer

If you’re juggling multiple debts and dreaming of turning them into just one neat little package, credit consolidation could be your ticket. The catch? Whether you make all your debts disappear really depends on the road you take. If you go for a debt consolidation loan, you’re essentially grabbing a fresh loan to take care of the old ones—think of it as reorganizing your closet without actually tossing anything out. This nifty move usually lets you keep the principal amount, but you might score lower interest rates or friendlier payment terms. Now, if you’re leaning towards a Debt Consolidation Program offered by altruistic, non-profit credit counselors, they’ll huddle with creditors to strike a better deal—imagine a calming yoga session for your finances—potentially lowering your monthly burden by slashing interest rates, though you’ll still foot the bill in full over time. On the flip side, choosing a consumer proposal through a Licensed Insolvency Trustee (LIT) can mean slicing down the total amount you owe, like getting a discount on your entire dance class package. But heads up, this formal process can leave a noticeable dent in your credit score for a while. It’s super important to think about what you’re eligible for—loans usually want you to flash some decent credit, while DCPs and proposals are there when things get financially intense. Seeking a chat with a savvy credit counselor or LIT can really clear things up, but remember, trustworthiness isn’t always a guarantee with every trustee. So, keep your eyes peeled! Licensed Insolvency Trustees are paid by creditors and lenders, meaning they don’t work for Canadians in debt. Some may double bill or charge additional fees. Be aware! Reach out by phone, text, or live chat if you have questions.

From: Insider Scott

Office of the Superintendent of Bankruptcy (OSB) Answer

Credit consolidation involves combining multiple debts into a single new loan or repayment plan, often to secure a lower interest rate or more manageable payment terms. When you consolidate your debt, you may work with a debt consolidation company that pays off your existing debts on your behalf, but you will still owe the overall amount of money originally owed, albeit under potentially different terms.

In Canada, this process is typically facilitated under guidelines set out in the Bankruptcy and Insolvency Act, which outlines various forms of debt management, but it does not eliminate the underlying debt. Instead, it simplifies your payments, but does not reduce the total amount owed unless you negotiate a settlement for less.

Consulting with a licensed insolvency trustee can provide clarity on how consolidation fits into your overall financial strategy. Your obligation to repay the debt remains; however, the approach to managing that debt may change.

From: OSB Helper

Related Questions to How Credit Consolidation Works

Here are the top 5 most frequently asked questions related to “How does credit consolidation work?” based on current trends and concerns in the context of Canadian financial practices:

1. What are the main strategies for debt consolidation?

Debt consolidation can be achieved through five main strategies: debt consolidation loans, credit counseling, balance transfer credit cards, home equity loans, and debt management plans[1].

2. Will I get approved for a debt consolidation loan?

Approval for a debt consolidation loan depends on your credit history, debt repayment history, and the lender’s assessment of the risk involved[2].

3. How does a debt consolidation loan simplify my payments?

A debt consolidation loan combines multiple debts into one monthly payment, potentially reducing interest rates and easing the stress of managing multiple debts[1].

4. What are the advantages and disadvantages of debt consolidation?

Debt consolidation can simplify finances, reduce interest rates, and speed up debt repayment, but it may also involve fees, and not all debts may qualify for consolidation[1].

5. How does debt consolidation affect my credit score?

Debt consolidation can positively impact your credit score if payments are made on time, but it may initially lower your score due to the new loan application and potential changes in credit utilization[2].

If you have a question about debt see our debt questions or ask your own debt related question.

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