Debt consolidation is the process of using different forms of financing like personal loans, Home Equity Line of Credit (HELOC), credit card balance transfers, or debt consolidation programs to pay off other debts and liabilities.
Debt consolidation can be used as a tool to refinance a student loan debt, credit card debt, past due bills, car loans, payday loans, and other liabilities. Usually, it is used to pay off a "bad debt" — an unsecured debt with a high-interest rate. In most cases, secured debts such as mortgages couldn't be consolidated.
It allows to eliminate late payment fees and accruing interest charges helps to rebuild credit. Debt consolidation simplifies multiple debts into a single loan and one monthly payment.
Debt consolidation loans don’t annul the original debt. It is transferred to a different lender or transformed into a different type of loan. For debt relief or for people who don't qualify for loans it may be better to consider a debt settlement rather than, or in conjunction with, a debt consolidation loan.
The official solution for debt consolidation is a consumer proposal regulated by federal legislation.
What is a debt consolidation loan?
A debt consolidation loan is a new loan large enough to combine multiple debts and pay off your existing high-interest debts and unsecured debts with a single monthly payment.
It's easy to get frustrated by several personal loans for emergency expenses or big purchases, lines of loans, credit cards with different due dates, minimum payment, loan terms, and interest rates.
With debt consolidation loans multiple debts are combined into a single loan, ideally with more favorable payoff terms: a lower interest rate, lower monthly payment, and easier payment schedule.
As a result, you have one payment a month which could be debited automatically. Debt consolidation payments are easy to manage: repay on time and regularly, and eventually positive payment history will help rebuild your credit report.
There are secured debt consolidation loans that use the value of your property to back your personal loan and unsecured debt consolidation loans, which have a higher interest rate but don't put your property at risk.
How to apply?
To get a loan consolidation you have to choose the lender to work with: a bank, a credit union, or an alternative — a personal loan finance company. Review the loan term, types of debt consolidation loan, and the scheme of borrowing process you should go through. If you apply online, approval usually takes 24 hours.
Calculate all your debts, take into account late payments, NSF, and other fees, and collect the documents received from the previous lenders.
Apply online or at an office according to the lender's instructions. Choose the type of your loan. You can consolidate debt faster using unsecured debt consolidation loans.
Some lenders let you take the money to pay off the outstanding debt faster, but others do that for you, connecting directly with other lenders.
Required documents
The most common pieces of information you will need to get a debt consolidation loan are the following: your pay stubs or a letter from your employer to prove your income, your credit report, bank statements, and current balances for each credit card or loan you wish to pay off, and letters from creditors or repayment agencies. A government-issued ID and address proof are also needed.
Main requirements
Requirements vary from lender to lender, in general, the income and creditworthiness are evaluated to qualify for a debt consolidation loan.
For the secured loans you should be a homeowner, have assets, or/and have a co-signer.
Traditional lenders (banks) have stricter requirements to make sure you can pay back an unsecured loan: a higher credit score, stable job, and large income.
Making only minimum payments on credit cards means you are in persistent debt and paying more money in fees and interest than your credit card balance. Your credit score declines and transforms into bad credit.
With no or bad credit score, unemployed or self-employed status, high debt, and high credit card balance your application could be denied or approved only with the highest interest rates.
Ways to get a debt consolidation loan
Debt consolidation loans are usually offered by financial institutions such as major Canadian banks and credit unions.
Also, you may use the services of debt consolidation companies in Canada. Check if the lender you prefer has a license in your province, is accredited to serve a loan, and has good reviews or has no complaints at Better Business Bureau.
If you have bad credit and still are offered an unsecured debt loan, be careful and check your lender.
Pros and cons
Review advantages and disadvantages of debt consolidation loans. It seems like a good idea to make one payment versus multiple payments with their fees, schemes, and penalties, but pay attention to the details to make a reasonable choice and save money.
Pros
An opportunity to pay back your debts sooner
The lower interest rate is available
Lower monthly payments are available
Simplified payment schedule with a single monthly payment
You can set a period to repay the debt
You can raise your credit score
Cons
The longer a loan, the more interest accrues
Fees could be charged
Credit checks may be conducted
Property and/or co-signer may be required
The interest rate could be high
The need to qualify for a loan (good credit, stable job, sufficient income)
Debt consolidation loans may suit you if you have a good credit score and manageable debts.
Otherwise, consider different options and be sure that you don't go on gaining more debts or continue using the old ones.
Legal regulations
The only Canadian government debt relief program is a consumer proposal that is defined and regulated by the Bankruptcy and Insolvency Act of the Government of Canada. Therefore, to offer debt consolidation services, financial companies need to obtain a license, which the government gives, so the Government monitors, but doesn't provide any services. At the same time, it warns that some companies offering help to pay off debt or repair credit are misleading consumers and advises to check for complaints in BBB, l'Office de la protection du consommateur (Quebec), and your provincial or territorial consumer affairs office.
The license for a Debt Management Program allows the company to collect and pull money, and apply the funds to make repayments of the clients' debts.
To find a trusted financial company look at the leading non-profit credit counseling organizations in your province.
How to repay a debt consolidation loan?
Usually, you can choose the terms and due dates of your repayments to be debited directly from your bank account. As a result, you won't skip your payments and eventually will be able to build a good credit score.
With a debt consolidation loan, you will avoid late or missed payments on your old debts and reduce the additional interest that could be added over time and interest payments as well.
You should be careful with postponed and missed payments, it's important not only because of the fees, but also to avoid the negative impact on your credit score.
A financial institution as the bank isn't as flexible as your creditor: it may refuse to accept the late payments when credit card lenders make money on them.
The real cost of a debt consolidation loan
Read the agreement and carefully review the conditions and terms of your debt consolidation loan:
Compare the current interest rate of your existing loans with the interest rate you are eligible for with a new lender. A consolidation loan's interest rates can be higher than the existing debt you are trying to consolidate.
Calculate the late and missed payment fees.
Overview if there are any administrative or registration charges.
When you consolidate several credit card debts with high-interest rates into a new loan you will be able to improve the cash flow. Your multiple bills could be replaced by one monthly payment. And due to the lower interest rate, it's possible to find a place on a budget for emergency expenses.
But if the total amount of monthly payments is too high, consider the other debt consolidation options.
The Canadian Government warns against high-pressure sales, unrealistic promises, and high fees. In addition, debt consolidation companies are usually for-profit businesses that make money from fees that they charge their clients.
Before you sign, make sure the debt settlement company agrees to inform you of payments they will be making to your creditors when they have power of attorney. This ensures you can confirm that your payments are being received.
Tips to choose the best debt consolidation loan
Shop around to find the best lender who can provide the most effective debt consolidation loan options. There may be a situation when it's better to stay with your lender, or even declare bankruptcy.
Various financial services companies that provide debt consolidation loans may offer you different interest rates depending on the type of product you choose. For instance, less interest could be paid on a line of credit than on a consolidation loan.
Secured loans may be a favorable borrowing option if you are a homeowner or have assets to back your loans.
You can apply for a larger loan than an unsecured loan. The amount is a crucial value if the debt you need to consolidate is a high-interest credit card or loan balance. You can use a property as collateral to negotiate a lower interest rate and lower monthly repayments.
An unsecured loan may be a good borrowing solution if you’re not a homeowner and want to get a loan quicker. Anyway, you should be ready to meet the requirements like credit score and proof of income. Make sure the installments are affordable and the payment plan fits your budget.
In a financial situation when you were rejected for a debt consolidation loan, debt relief could be achieved with a Debt Consolidation Program.
If you won't be able to pay off your unsecured debt consolidation loan, you will be sued by the lender and the debt may be sold to a debt collector.
Watch out for unrealistic promises. You could end up with a new unaffordable personal loan with high fees, interest rates, and a bad credit score.
You may talk directly to your creditor if you have difficulties in repaying the line of credit or credit card debt. Most of them have special programs or conditions made to assist you in paying off your debts.
