What is a Consolidation Loan?
To put it simply, a consolidation loan allows a borrower to combine multiple debts into one debt, usually at a lower interest rate than what they are currently paying. This process involves taking debts that are owed in the form of credit card balances and private loans, consolidating them into one larger debt, and then paying off that one debt with less interest being charged.
Many Canadians are taking advantage of the consolidation trend to help minimize the amount they are paying in interest on their current debts. Consolidating your loans can also simplify your monthly expenses by reducing the number of different payments you are making.
Eligibility Criteria and Interest Rates
Similarly to mortgages, debt consolidation loans can be obtained from a lender or financial institution, however, there are specific requirements for these that differ from other loan products.
Borrowers usually receive no more than 10% of their net worth with an unsecured consolidation loan, meaning your net worth must be fairly high to get a decent loan amount. This steep requirement can make it difficult for borrowers to obtain an unsecured consolidation loan. If you were to secure the loan by offering some collateral (a car you own outright, for example) you may be able to increase the amount of the loan you are approved for.
If you decide to use something like a vehicle as collateral, keep in mind that the lender will value the vehicle conservatively, which will be less than fair market price.
For some borrowers, neither of these options will help their current financial situation. If you don’t have a large net worth or enough to use as collateral, a home equity or personal line of credit may be the best option.
Consolidation Loans – Right for Retirees?
As a large portion of the Canadian population looks towards retirement, we understand the worry they face that they will no longer be able to afford their current lifestyle. Using credit cards can be an easy fix for everyday expenses in the short term, but over time, the high interest rates can make this option far too expensive.
A consolidation loan can help elderly citizens and retirees get out from under their high-interest credit cards debts, saving them money and relieving the stress of financial worry in retirement.
Consolidation Loans v. Reverse Mortgages
From the perspective of a borrower looking towards retirement, consolidation loans can be very limiting. In most cases, unsecured consolidation loans don’t allow for very large loan amounts and home equity or personal lines of credit can be difficult to get approved for. These types of loans will also require the borrower to make regular monthly payments towards the principal of the loan.
For homeowners who are over the age of 55, reverse mortgages can provide over 50% of the market value of their home. With this type of loan, the borrower receives tax-free payments that are not required to be paid back until they sell the home or pass away.
If you are interested in more information on debt consolidation loans – especially reverse mortgages – give the experts at Cashin Mortgages a call today!