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Is Debt Consolidation a Viable Option?

Usually when the finances begin to get out of control it’s because there is a lot of debt that has to be dealt with.  When this happens individuals then start looking for solutions to be able to turn things around.   One of the options that often gets put on the table is looking at the consolidations of loans.

This is a loan that is not necessarily easy to get and quite often may not be the right option.  Most often when individuals are able to negotiate a debt consolidation loan it ends up being with quite a bit more interest attached to it.  However, this may not be a bad thing if it’s going to reduce the enormous amount of interest that usually comes with the credit cards.

Individuals that are looking at debt consolidation should be super careful about what resources they are going to use for this.   There are so many opportunities available online but these don’t always turn out to be great opportunities, as in some cases they can be scams and in other cases they will only do a partial consolidation which does nothing for the financial situation.

So the key is to seek out a reputable lender that is going to be straightforward with their loans.   Credit card interest rates are extremely high and range between 19.9% and 29.9%.   So debt consolidation that comes in at a much lower rate certainly makes it viable.

If you are looking at the debt consolidation as a temporary Band-Aid however, because your financial circumstances are so bad then this may not be a good recourse because you may be just holding off the inevitable for a mere few months.   Your better choice of action may very well be taking a look at what your bankruptcy options are.   A lot of times seeing a credit counsellor will help you to get things back on track because quite often when debts get out a hand the money begins to get mishandled, and people start to give up on using any type of positive interaction in getting under debt control.

A lot of individuals are still able to handle their credit card debt but what they end up doing is just paying the interest only and this debt can spread out for years upon years with the principal never being reduced.   The one good aspect about a debt consolidation is that if it is arranged properly where you are playing on both interest and principal then your debt ratio is being reduced.

Another big pitfall about the debt consolidation is that once you get all your debts into one package where you are making a one payment only and your credit card debt has been cleared off you still have access to your credit cards.   There is the temptation to start using them once again.  Often what ends up happening is that you now have a debt consolidation bill to pay and you are back on the road to financial disaster with a large amount of debt owed on the credit cards. If you are truly going to use that consolidation as your solution then you seriously need to consider relinquishing your credit cards so that you are not going to end up in this situation once again.

 

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Sam Seidman, CPA, CA, LPA
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Toronto, Ontario
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Email: sam@torontoaccountant.ca

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