3 tips to make a debt consolidation loan work for you

A consolidation loan is not a magic solution for debt. Explore all of your debt relief options first and make an informed decision that will benefit you in the long run.

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Q: We have been struggling with our debt for a long time. For a while things improve, then something happens and we fall behind again. The last time we maxed out our credit cards was for car repairs and with the cost of living so high right now, we can barely make the minimum payments. One of the credit card companies contacted me the other day and suggested I get a consolidation loan to pay off what we owe. I talked to my bank, and it looks like a loan would solve our money problem. Is it too good to be true? ~ Brad

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A: Debt has a funny way of accumulating over the years. For a while, we can sweep it under the rug and not worry too much about it. But there comes a time when it overflows and we have to deal with it. Debt unfortunately does not resolve itself and does not disappear on its own.

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There is a lot of different ways to deal with debt and there is even different types of debt consolidation. The options depend on your overall situation and whether you can afford to make payments or not. Once you’re able to make payments, getting back on track takes time and effort, and you’ll encounter obstacles along the way that will make you wonder if you made the right decision. In the long run, though, you’ll be thankful you dealt with it when you did.

When it comes to a debt consolidation loan There are things you can do with your bank or credit union to make sure the loan helps you get ahead and meet your financial goals.

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Recognize that a loan is only half a solution

There are two key factors to consider when considering solving your debt problem with a consolidation loan. The first is to identify why you got into debt in the first place, and the second is whether the loan will help you pay off what you owe. It only leads to more stress if the loan ends up doubling your debt and leaving you worse off than before you took out the loan.

A debt consolidation loan is not a magic solution for debt. For the loan to free you from debt, you need to think carefully about how you can change your habits and clean up your finances so that you don’t spend more than you earn. This means establishing a realistic budget that you use to guide your spending decisions. Your budget will also take into account setting aside money in savings so that when an emergency expense occurs, you have at least some savings to pay for it. If you need to use the credit to pay the rest, you’ll need to adjust your budget to account for higher debt payments until you’re back on track.

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Dangers of Different Types of Consolidation Loans

Change the way you use credit to avoid future problems

Many Canadians can hardly imagine how they would manage without their credit card. Even those who rarely use them would struggle to shop online or book a hotel room without one. However, if you want to move on and use a consolidation loan to get your finances back on track, you need to be aware of how you use all forms of credit.

For example, if you have a secured line of credit, it is usually not included in a debt consolidation loan. If you continue to use your secured line of credit after obtaining a loan to consolidate your credit card debt, the effectiveness of the loan could turn against you. If you have overdraft protection on your bank account, request that it be blocked or removed if you don’t trust yourself to stay in the black. If you’ve used high-interest payday loans to make ends meet, make sure those debts are paid off with the loan and focus on bringing your expenses in line with your income instead.

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What to do if you’re struggling with bad credit

A typical condition of a consolidation loan for credit card debt is that the credit cards are canceled once they are paid off with the loan proceeds. However, as you make regular loan payments, your credit rating will recover. If you’re a spendthrift and miss the convenience of having a credit card, if you haven’t changed the way you use credit, there’s a chance that the debt problem will start again.

Hidden Dangers of Using a Line of Credit to Consolidate Debt

Understand the non-financial influences on your spending

Money management isn’t just about dollars and cents. It’s as much psychological and emotional as it is mathematical. We didn’t need to consolidate our debt because we couldn’t calculate our budget accurately; financial problems are rarely so simple. In fact, many of our spending decisions are made long before we set foot in a store or log into our favorite retailer’s app.

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When we try to make ends meet on a daily basis, it can be difficult to appreciate the complexity of the decision-making processes that go into managing our money. Our values, the goals we set, the choices we make, the habits we have, the social media we use, the friends we keep, as well as how we use credit, our attitudes towards debt , as well as lifestyle factors and what we don’t all have an impact on our expenses.

Each of these factors gives us the opportunity to make positive choices and changes with our money. Replace thoughtless spending and impulse buying habits with the abandonment of costly attitudes towards credit and debt. Develop strategies to keep your money safe from yourself by following money savvy social media profiles. Join groups and associate with like-minded friends to help you keep your lifestyle choices in line with your budget.

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Why an Instant Online Payday Loan Won’t Solve Money Problems

The Basics of Using a Consolidation Loan to Get Out of Debt

There is no one-size-fits-all solution to settling your debts. Before following the advice of a creditor, take the time to explore all your options in order to make an informed decision. There are options that consolidate your debts and others that consolidate your payments. With some options you have to borrow more money, with others you restructure your budget. Some options have a more severe impact on your credit rating than others, and there are even options with interest relief to help get you back on track. The right option will help improve your financial skills and provide you and your family with a financially stable future.

Related Reading:

Get free help with debt and money issues

How to break a spending habit

What is debt consolidation and how does it work in Canada?

Scott Hannah is president of the Credit Counseling Society, a non-profit organization. For more information on managing your money or debt, contact Scott by E-mailCheck nomoredebts.org or call 1-888-527-8999.

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Michael M. Tomlin