Having many debts increases the risk of being in default and, therefore, can damage your credit report. To facilitate the repayment of your debts, a debt consolidation loan can be an interesting solution for you.
Debt consolidation collects the debts into one payment per month. Generally offered at a cheaper rate than credit cards, loans granted for consolidation also reduce the monthly payment.
According to the Government, debts that you could include, but are not limited to, are cards and lines of credit, utilities, and other loans related to consumer goods. Note that mortgages can not be included in a consolidation loan. Check with your financial institution for all eligible debts.
Who can perform a debt consolidation?
Here’s a concrete example of how debt consolidation can help regain control over your debt consolidation loan. Annie is a 30-year-old professional who accumulates $ 20,000 in various debts, mainly credit cards, in addition to her student loans. She manages to pay the minimum required, most of the time, but still feels that she can not cope. She thinks she should use the consumer proposal and try to find an arrangement with her creditors. She is even considering bankruptcy . During a meeting with a financial advisor, the latter proposes the consolidation of debts.
According to Éric Lebel, a recovery consultant and partner at Raymond Chabot Grant Thornton, debt consolidation is an option for people with good credit. “Before thinking about debt consolidation, it’s important to make sure you’re solvent,” he says.
Solvency, or insolvency, is the ability or not of a person to pay bills and debts as they fall due. In his practice, Mr. Lebel meets many people who hope to achieve a debt consolidation agreement with a financial institution. “It’s sometimes their last hope,” he says.
How to apply for debt consolidation?
Above all, the bank assesses the risk you represent. She studies your credit history, your debt ratio, your repayment behavior, and your ability to pay your loans. “If the bank feels that you would have had trouble repaying other creditors, it may not give you the loan,” says Lebel.
Banks may require a guarantee through an endorser. “If you have a good job and equity on your home, for example, you could be a good candidate, depending on the amount of debt to consolidate,” he says.
Do you have the ability to repay your debts?
To find out if debt consolidation is a winning option for you, you could start by assessing your ability to pay the required loan for all of your debts. “You have $ 20,000 in financial institution and department store credit card debt at rates of 19% and 29%. By consolidating these debts, even at a rate of 12%, the monthly payment will be lower and the amount of interest paid at the end of the term, lower. It is therefore advantageous. Paying less interest each month allows you to recover your finances by repaying more capital.
If you have experienced financial difficulties and are not eligible for debt consolidation, you can apply for a second chance at credit. Repaying this loan every month restores your credit history and increases your chances of getting a traditional loan or debt consolidation.
What to know before doing a debt consolidation?
If your credit report allows you to get this kind of loan, here’s how you could benefit from it:
- One payment
- The interest rate is usually lower than credit card rates.
- The monthly payment is lower than if you repay each debt individually.
- At maturity (maximum period of 5 years), you will have repaid all your debts. The term is generally shorter than the term for the repayment of credit cards with higher interest rates.
Your credit report remains intact
By consolidating, the overall debt remains the same, contrary to the consumer proposal. And even after consolidating credit card balances, remember that the amount of debt to be repaid will increase if you continue to use them.
For an expert, there are few disadvantages to debt consolidation. “But finding a bank that will lend you money to pay off other banks or creditors will be easier if you do not have financial difficulties,” he says.
Give yourself some time to review your financial habits and to make sure you are on the right track in achieving your goals. If in doubt, your financial adviser can help you.
Do you have debts?
You are not alone and you are certainly not alone in seeking relief. The average adult with a credit card has a debt of $ 5,839, according to. In addition, 38% of US households have a revolving debt each month because they are unable or unwilling to pay their balances.
These figures may not surprise you and will even offer you some comfort, knowing that there are other similar struggles. However, even relatively modest debts can affect your life and make your financial future more difficult.