What You Need to Know Before Consolidating Debt
Information on Debt Consolidation
What you need to know before consolidating debt.
Get fast facts on debt consolidation, what it could mean your finances and whether it’s the right option for you.
A proactive approach to debt management is always a good thing but it’s important to understand the implications of your financial decisions.
If you’re considering consolidating your debts, you’ll want to ensure that you understand exactly what consolidating means, which debts it can apply to and what the long-term consequences are.
Although debt consolidation remains a popular choice of financial management, it isn’t the only debt solution that’s available.
Before you make any arrangements, take a look at what you need to know before consolidating debt.
With this information, you’ll have a deeper understanding of what consolidation could mean for your finances and whether it’s the best course of action for you.
1. What is debt consolidation?
Before you get anything further, it’s critical to understand exactly what debt consolidation is, and what it isn’t.
If you agree to consolidate your debts, you will make one monthly payment towards all the debts that are subject to the consolidation agreement, rather than paying them individually.
A percentage of the monthly payment will go to each creditor and be used to pay off your outstanding debt.
2. Not all debts can be consolidated
Most consumer debts can be consolidated, providing the creditors are willing to accept your proposed consolidation agreement.
However, government-related loans can’t be dealt with in this way.
This means that student loans, unpaid taxes and GST balances can’t be included in a consolidation agreement.
Furthermore, consolidating your debts means you’ll be entering into a voluntary agreement with your creditors.
If a consumer creditor rejects your proposal, they can’t be forced to change their mind.
While you could move forward with your plan to consolidate your debts, you will still need to pay any creditors who are not party to the agreement.
3. Interest can still be applied to your debts
Depending on the type of debts you have, you could be paying a significant amount of interest.
In fact, debt often becomes unmanageable when the interest accruing each month exceeds the repayment you’re making.
When a consolidation agreement is in place, interest is often applied.
You may even find that the interest rate on your consolidation loan is higher than the interest rate you’re paying on your existing debts.
Depending on the level of interest you’re being charged, repaying your debts via a consolidation agreement could mean that it will take you far longer to achieve a debt-free status.
4. There can be other obligations
When you apply for a consolidation loan, there may be additional obligations you need to undertake.
Many people are required to take part in financial counselling sessions when they obtain a consolidation loan, for example.
Similarly, you may need a guarantor or co-signer in order to be deemed eligible for a consolidation loan.
In addition to this, the terms and conditions of your loan may also state that you are required to keep your tax returns up to date and ensure your taxes are paid in full or else you risk breaching the agreement.
5. Various consequences can arise from missed payments
If you enter into a consolidation agreement and are unable to pay the agreed monthly payments, there are various consequences that may follow.
This will be dependent on your loan provider and the specific terms of your agreement, so be sure to read the small print carefully.
If a consolidation agreement is abandoned, for whatever reason, you will still be liable to pay off your outstanding debts.
When people are unable to obtain an alternative consolidation loan, they typically revert to paying creditors individually again.
However, you may also be required to pay additional fees or charges to your consolidation loan provider if you have breached the terms of your agreement.
Finding the Best Debt Solution
Although debt consolidation can be a viable option for many people, it isn’t always the best form of debt solution.
A consolidation loan could enable you to keep more of your income each month but it’s also likely to mean that it will take you longer to pay off your debts.
As a result, the continually accruing interest may mean that you pay in the long run.
Before you make any decisions regarding the right type of debt management, it’s important to access advice from a reputable source.
At Bankruptcy Canada, we’ve been helping people to overcome their debts since 1999.
To speak to a licensed insolvency trustee about your financial situation today, call us now.