Debt Consolidation

A debt consolidation loan is considered a favorable option for many Canadians who are looking for an alternative to personal Bankruptcy. If you have a good credit score and stable income, a debt consolidation loan may be the answer to reducing your debt.

A debt consolidation loan is a financial tool that allows you to merge multiple debts into one, simplifying the payment process with a single monthly installment.

For example:

If you have outstanding debts of $15,000 with multiple unsecured creditors, such as credit card companies or bank loans, it is possible to approach your bank or another lending institution to borrow $15,000. By doing so, you can pay off the existing accounts and consolidate your debts into one new monthly payment to the loan provider.

Do I Qualify?

There are two types of consolidation loans: secured loans and signature only (unsecured) loans.

To qualify for a secured loan, you need good credit and an asset worth the same amount as the loan. For example, if you have at least $15,000 in equity in your home or car, you can use that equity to secure the loan. If your credit score is low because of financial issues, you may have to pay a higher interest rate.

Signature only loans are available to those with excellent credit. These loans do not require any collateral, as they are guaranteed solely by your signature. However, signature only loans are not common and usually come with higher interest rates.

Which types of debts are included?

The consolidation loan can be used to pay off any outstanding debts. Once the loan funds are received, the money can be used as desired.

What are the advantages of debt consolidation?

One of the main benefits of debt consolidation is the convenience it provides. Instead of managing multiple creditors and making several payments each month, you only have to write one cheque to your loan provider.

If your credit score qualifies for a lower interest rate, you can save money. Paying one payment each month can free up extra income and help you avoid late payment and over the limit fees.

Before making any additional payments on your loan, it is recommended to inquire with your lender about any potential prepayment penalties. If your loan terms permit, utilizing any surplus funds to accelerate your loan repayment can result in further savings.

Improving your credit score is possible. By reducing the number of bills you have to manage, you decrease the chances of paying your bills late. On-time payments play a crucial role in your credit score. When you only have one bill to pay each month, you can easily establish a new history of on-time payments, which can lead to a quick improvement in your credit score. Furthermore, a debt consolidation loan does not have a negative impact on your credit score like a Consumer Proposal or Bankruptcy.

You can stop receiving harassing calls from collectors by getting a consolidation loan. This loan won’t offer legal protection like Bankruptcy or a proposal, but if you pay off your balances, collectors won’t need to contact you. Make sure to submit your loan payment on time each month to avoid calls from your lender. After paying off your debts, check your credit report to confirm that it now shows zero balances.

What are the drawbacks of debt consolidation?

You are still responsible for the debt after consolidating it. The consolidation loan does not eliminate the debt, but rather changes how you make the payments, making it potentially more manageable.

Your asset is at risk if you do not meet the terms of your loan, as it may be repossessed.

A debt consolidation loan does not address the underlying issue that led to credit trouble in the first place. In fact, if credit management skills are not improved, a consolidation loan can potentially exacerbate the problem.

After paying off your credit cards, your statements show a zero balance. You now have available credit that may be tempting to use. Unfortunately, some borrowers cannot resist the temptation and begin using their cards again, accumulating new debt. The only change now, however, is that you still have to repay your consolidation loan and your home or other secured asset may be at risk.

Credit counseling can be a helpful tool when paired with debt consolidation, as it can assist in avoiding repeating the same financial mistakes that led to the initial trouble.

Paying less each month may not actually save you money. The overall cost of your loan could end up being higher. A lower interest rate on a larger amount over a longer time period might add up to more than paying your credit cards individually. If you want month-to-month relief, a consolidation loan might be a good option. Compare and do the math to see which choice is best for you.

Optimize the benefits of your consolidation loan.

Here are some tips for effectively utilizing a debt consolidation loan.

  • Determine the total repayment cost of the loan compared to the cost of your current credit accounts.
  • Gain a better understanding of how to responsibly use credit.
  • It is advisable to cut up any excess credit cards and limit oneself to only one card.
  • Create a personal budget and adhere to it.

Ways a Licensed Insolvency Trustee Can Provide Assistance

A debt consolidation loan can be both helpful and harmful. It may provide temporary relief from debt, but you could find yourself in financial trouble again in a few years. To make an informed decision, consult a Licensed Insolvency Trustee. Ensure that debt consolidation is the right choice before pursuing a consolidation loan. 

Debt Matters Canada offers free initial consultations with trusted professionals. Take the time to review your finances thoroughly. There is no obligation or judgment.