If you are juggling multiple debt payments each and every month, it can be a struggle keeping up with knowing who to pay first. You may even find yourself unable to pay all of your bills each month because there is simply not enough to go around. Debt Consolidation allows you to combine all of those debts into a single monthly payment. Consolidating your credit will make managing your debts easier. It can also save you money.
There are however, different forms of debt consolidation in Canada. The most common form of consolidating your debts is with a new debt consolidation loan through your bank, credit union or other financial institution. It is also possible to consolidate your debts through a debt consolidation program like a debt management plan or consumer proposal.
Debt Consolidation Loans in Canada
A debt consolidation loan is a personal loan that allows you to consolidate your credit card debt, line of credit, car loan and similar debt, into one single loan.
For example, if you have three credit cards, you may be able to eliminate your credit card debt by getting a debt consolidation loan through your bank or credit union to pay off the credit cards so that you only have one payment each month instead of three.
Advantages of Debt Consolidation Loans
If you are eligible, there are several advantages of a debt consolidation loan:
- You replace many payments each month with one single payment. This can make managing your debts easier. You no longer have to worry about which debt to pay first and how much you have to pay on each different loan.
- Your debt consolidation loan may have a lower interest rate than the rate you are paying on your credit cards. Lowering your interest rates reduces your total debt repayment costs helping you eliminate your credit card debt.
- Lower interest costs combined with extending the term of your debt consolidation loan can reduce your total monthly payments. This can mean the difference between running out of money at the end of the month and having cash left over.
Do I Qualify for a Debt Consolidation Loan?
Debt consolidation works for those looking to combine debts related to credit cards, public utilities, car and other personal loans. Not all debts however can be consolidated. A mortgage, for example, is not eligible to be added to a consolidation loan.
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To qualify for a debt consolidation loan through your bank or other lending institution you usually need to have fairly good credit and sufficient income to be able to repay the loan. When you apply for a consolidation loan your bank may ask to see:
- A copy of your monthly budget to determine if you can meet your loan payments as well as copies of your most recent tax returns and pay stubs as proof of your income.
- Copies of your most recent loan statements to show exactly how much you owe. They will also review your credit report for any other debts and notes about your credit history.
- Depending on your credit, you may also need a co-signor or collateral (such as a car or a house). They may ask for an appraisal of the asset you will be using as security.
One of the most common forms of debt consolidation is to use the equity in your home to refinance with a second mortgage. Using your home as collateral, you can usually negotiate a lower interest rate and extend your payment terms over a longer amortization period. Be careful however that you do not extend the term out too far, keeping you in debt longer than you would like to be.
Alternatives to Debt Consolidation Loans
Debt Consolidation Programs
For many, a consolidation loan is not the best way to reduce their debt. Even if you qualify for a debt consolidation loan, all you may have done is transferred your debts from one form of debt into another. So while you may have reduced your interest costs, you are still left with repaying outstanding debts. If the total amount of your outstanding debts is overwhelming, reducing your interest costs is not going to be enough.
If your debts are too large for a debt consolidation loan to work, then you may want to consider other debt management programs that allow you to:
- consolidate your debts
- have one easy monthly payment
- get out of debt sooner
A better alternative to debt consolidation may be a debt management plan administered by a not-for-profit credit counsellor, or making a deal with your creditors for partial payment through a formal consumer proposal. Both of these debt management options can help you reduce your debts faster and begin rebuilding your financial recovery. In a debt management plan you repay your debts in full, but can often have interest costs and penalties forgiven. In a consumer proposal, you pay back a portion of what you owe while having the advantage of legal protection from your unsecured creditors. Both programs allow you to consolidate your unsecured debts into one, lower, easy monthly payment.
If you are considering debt consolidation in Canada as a way of dealing with your debts, talking to an accredited expert is the best way to explore your options and get out of debt sooner. Contact an advisor today to get free, expert advice about which debt consolidation program is your best solution. Our advisors are all licensed trustees and insolvency counsellors with a broad range of experience in helping people consolidate and eventually eliminate their debts.
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