Debt Consolidation – How Does it work?
Debt consolidation is replacing several debts with one. You borrow enough money in one lower interest loan to pay off many other higher interest debts. That way you only make one payment instead of several, and the overall interest you pay is less.
For example, if you have unpaid balances on four credit cards, you might get a debt consolidation loan to pay off all four. You would then have a single payment to make each month at a much lower interest rate than your credit card interest rates.
Why might I want to consolidate my debts?
People like consolidating their debts because it makes their life easier in these ways:
- Easier cash budgeting, with one predictable monthly payment instead of several.
- Lower payments, because a debt consolidation loan often has a lower interest rate than unsecured debts such as credit card accounts.
- Lower payments, because a debt consolidation loan may have extended terms.
How can I get a debt consolidation loan in Canada?
- Your monthly budget, showing that you can afford the loan payments.
- Evidence that you have enough income to make the payments. This could be your pay stubs, for example.
- Extra security, either collateral (perhaps your house or car) or a co-signer.
What are the Risks?
There are some definite risks and disadvantages to weigh against the advantages. For example, if you are not absolutely sure that you can make the payments, do you really want to risk losing your house?
We suggest you research your options before deciding if a debt consolidation loan in Canada is the best option for you.
What if I can’t get a Loan?
If you’ve tried to get a debt consolidation loan and have been denied you may want to consider filing a Consumer Proposal. A Consumer Proposal is a legally binding agreement between you and your creditors where you agree to pay back a portion of your debt over time.