What is Debt Consolidation?
Debt consolidation simply put is the act of taking out a single loan to pay up your multiple debts. It is a financial act that joins multiple bills to get her to form a single monthly payment at the lowest rate of interest possible.
Debt consolidation makes it easier to deal with several debts because you have only one monthly payment to worry about. The Government of Canada’s Office of Consumer Affairs explains debt consolidation as “a loan usually gotten from the bank that lets you repay your debts to all your creditors at once.”
This method of settling debts helps you save more because the interest rates are minimized.
How Does Debt Consolidation Work?
The most popular way to consolidate debts is by taking out a consolidation loan.
When you find the lender you choose to use, you explain your financial situation and ask for a large sum of money to help pay off your smaller debts. The sum you apply for has to be enough to cover all the smaller debts.
This large loan will be charged with a much lower rate of interest based on your credit score. When you have settled your existing debts, you are left with only the consolidation loan to settle. Consolidation loans are settled in fixed monthly payments.
What Type of Debts Can You Consolidate?
The first thing to note is that, unlike unsecured loans, you can’t consolidate secure bank loans; loans that have collateral.
But, you can consolidate tax debts, public utility debts, retail store cards, child support debts, credit cards, unsecured lines of credit, and gas cards.
When Should You Apply for a Debt Consolidation
Certain financial situations work better if you use debt consolidation as a solution. The major situations are:
- When you have a stack of consumer debt.
- When you are trying to refund a credit card debt.
- When you have a lot of equity in your home.
Credit card debts are the major reason most Canadians use debt consolidation. This is because credit cards carry very high-interest rates. Rates that are even higher than unsecured bank loans.
However, before you are approved for a loan in any situation, the lender will check your income to see if it can carry the monthly consolidation payments.
Can You Use Debt Consolidation with Bad Credit Rating?
It is very difficult getting qualified for a debt consolidation loan if your credit rating is poor. This is because lenders rely on your payment history and credit scores to determine if they will find you or not. If you are not one to pay your existing debts, the chances of you qualifying for a consolidation debt are very slim.
Although, some lenders still give out credit to people with bad credit ratings. Borrowers would have to offer a reliable co-signer or some form of security. Interest rates are usually higher for people with bad credit ratings.
Best Way to Pay Back Debt Consolidation Loans
When you want to pay off a consolidation loan, it is best you make the minimum payment on the loan. This will help you to get out of debt faster.
The minimum payment on your line of credit mostly covers only one of the interests you owe. It is difficult to get out of debt if you stick to this amount. You should increase the amount paid because you’d pay less interest and pay off your debts faster. If you make your payments on time, a debt consolidation loan boosts your credit rating.
Are There Benefits of Debt Consolidation?
In addition to lowered rates of interest, debt consolidation offers some nice benefits.
- You only have to make one payment per month to one lender. No need to go around making different payments to different lenders.
- All your outstanding debts will be fully refunded by your lender.
- You have the option of using your properties to secure a lower rate of interest.
- Your credit ratings will be protected.
- You don’t pay a high rate of interest which means that you can get out of debt faster. This is the best benefit of using debt consolidation. It’s alarming how paying high interest can turn a little debt into big debt in a little time.
Eligibility Requirements Necessary to Apply for a Debt Consolidation Loan
Different lenders have their exact requirements, but the general requirements needed to apply for debt consolidation loans are:
- You must be at least the age of majority in your province.
- You must be a Canadian citizen or a permanent resident.
- You should be able to provide proof of a reasonable level of monthly expenses.
- You should have a steady source of income.
- You should have an acceptable credit rating.
For Canadians that are in serious financial messes, debt consolidation is an effective solution. If you possess a reasonable credit score and the amount you owe in debt is manageable, you are good to go with debt consolidation.
Once you have decided on this method, make a thorough research before selecting a lender to borrow from.