Debt consolidation: a way out of debt
Debt is a reality that affects all segments of the civilian population. For those seeking to regain control over their financial situation, debt consolidation is a way to turn the tide and restore balance. Here are some answers to frequently asked questions about this solution to debt.
debt consolidation: what is it?
Granted by a financial institution or bank, debt consolidation (or consolidation loan) allows individuals who are struggling with debt to repay their loans to creditors in a single monthly payment. In one go, they will pay off the amounts of their debts from credit cards, lines of credit, personal loan and/or other.
What are the benefits of debt consolidation?
If you are struggling to make ends meet or want to breathe new life into your budget, debt consolidation is a great option for unburdening yourself from debt. The consolidation loan has many advantages, including:
- Fewer monthly payments (one payment only)
- Savings on interest costs (lower interest rate than credit cards)
- Simplified management of your finances
- Credit score remains unaffected (provided you comply with the terms of payment of the consolidation loan)
Who mainly benefits from debt consolidation?
Although beneficial on many levels, debt consolidation is not necessarily suitable for everyone. If you recognize yourself in any of these situations, debt consolidation could be helpful and valuable to you:
- You have a hard time making your monthly payments
- You use credit for most of your purchases
- You keep on spending as if you have no debts to repay
- You use another form of credit to pay off your other debts
- You use your savings to meet your basic needs
If you present a high risk, you might have to find an endorser to co-sign your loan. Your financial institution could also order that your credit cards be destroyed.
Are there any criteria to determine my eligibility for debt consolidation?
Sometimes financial institutions are reluctant to grant a consolidation loan, as only they will have to assume the entire risk of repaying your debts given you are no longer able to. Financial institutions rely on a series of criteria to assess eligibility for debt consolidation
- You must have a good credit rating
- You must have a stable job and income
- Your debt ratio should not exceed 40%
- In some cases, a co-signer or guarantor may be required
What are the alternatives to debt consolidation?
- Make a new application: if your financial situation has improved since your first debt consolidation application, you may be entitled to a second chance. However, keep in mind that your credit report can be negatively impacted with each new application.
- Go with a consumer proposal: just like debt consolidation, the consumer proposal enables applicants to gather debts into a single loan and make only one monthly payment. However, this option affects your credit rating and requires creditor approval.
- Declare bankruptcy: often perceived negatively, bankruptcy is more like being allowed to put the past behind us and start over on a good basis. Trustees in bankruptcy recommend this last resort option given the debtor meets specific conditions.
For personalized advice on the solution that best suits your reality, feel free to call or write to us today. One of our financial recovery advisors will be happy to help you get back on top of your finances!