What is Debt Consolidation in Canada?
Debt consolidation is the process of consolidating (combining) your debts through a consolidation loan that allows you to repay most or all of the creditors you owe money at once.
This allows you to make your debt more manageable and gives you only 1 payment to make which eliminates the risk of missed or late payments.
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Another major benefit of consolidating your debt is you can consolidate your highest interest rate loans into a lower interest monthly payment.
This can help you save thousands in interest charges depending on your amount of debt.
How do debt consolidation loans work?
1. The first step is to apply for a new loan that will allow you to pay off all of your current debts.
2. If the lender approves your application, they will set an interest rate for you based on your credit rating.
3. You will use the money from your new personal loan to pay off your existing debts you wish to consolidate.
4. Once you have paid off your other debts you will be left with only the 1 payment on the debt consolidation loan.
Can I Include All Of My Debts In A Consolidation Loan?
You can include all of your unsecured debts in a consolidation loan but you cannot include a secured debt like a mortgage for example with a debt consolidation loan for debt relief in canada.
Will I Qualify For Debt Consolidation?
If you have a high enough credit score you will likely qualify for a debt consolidation loan if you meet the other requirements for the loan to get debt relief.
Consolidating your debts allows you to become debt free faster.
If you are starting to experience financial difficulties it might be best for you to look into a consolidation loan before your credit becomes too poor.
What Should I Do Before Applying?
First of all, you might want to consider checking your credit score to see if there’s a chance you will be approved for debt consolidation.
Before you apply for your loan you should make a list of all of your debts, even those you are not going to consolidate, as it is best to inform the loan officer about all of your debts when you apply for your consolidation loan.
When the loan officer runs your credit check they will have access to the information on all of your debts anyway so it is best to be honest and clear up front.
What Should I Do Before Choosing a Loan?
When you are shopping around for a loan to consolidate your debts, do not be afraid to shop around if you are not happy with the interest rate being offered by the first financial institution.
Some finance companies might offer a consolidation loan with an extraordinarily high interest rate (usually for people with poor credit) so you must always review all of the terms and conditions before you sign any agreements for debt consolidation.
The finance company that offered to consolidate your debt might pay your other creditors directly so it is important you clarify this point with your lender.
What types of debt can be Consolidated?
You can use a debt consolidation loan to pay off all of your unsecured debts such as:
- Credit card debt,
- Lines of credit,
- Unsecured personal loans,
- Utilities debt,
- Taxes owed,
- Child support arrears,
- Gas cards.
You are not able to consolidate secured loans.
What Are The Advantages Of Consolidating My Debts?
The advantages of getting a consolidation loan to consolidate your debts include saving on interest charges, and having your creditors paid in full quickly which can help you maintain a good credit rating, or improve your credit score.
Consolidating high interest credit card debt can help you eliminate your debt quickly and save you money in interest costs.
A debt consolidation loan can be a personal loan from a debt management program or another credit counselling agency.
If it is not right for you another debt relief option such as a consumer proposal could be viable.
As a debt management plan, a debt consolidation program is a good way to pay off your debts if you can qualify for the terms of the loan.
Disadvantages of using consolidation loans
Frankly, debt consolidation is not a solution that works for everyone.
You must have a good credit score to reap any benefits from a consolidation loan.
You can qualify for a loan with a credit score of as low as 650, but generally you need a very good credit score (720+) to receive any benefits from utilizing this debt solution.
Using Consolidation With Bad Credit
The interest rate charged on a personal loan can be uup to 45 percent or more.
Therefore, if the rate you get on a debt consolidation loan is similar to the rates charged on your credit card debt, you might want to consider another solution to get out of debt and rebuild your financial future.
Where Can I Consolidate my Debts?
A consolidation loan is available through banks, credit unions or caisses populaires (the francophone equivalent of a credit union).
If you are unable to qualify to consolidate your debts you can schedule a risk free insolvency evaluation so you can learn about your other options for handling your debt.