Debt Consolidation – How Does it Work?

Written by: A Licensed Insolvency Trustee

What is a debt consolidation loan?

When an individual owes debt to a lot of different lenders or accounts it is difficult to keep on top of the monthly payments. Debt consolidation is a way to consolidate debt into one consolidation loan. This means that you would take out a loan that would pay all of your existing accounts. You would then be left with one loan payment each month, often saving you interest over time.

Why should I consolidate my debts?

Debt consolidation has many benefits:

  • It is often easier to budget as the monthly payment is fixed;
  • You will repay your debt in a set time frame;
  • You will usually pay less interest on the total debt you have accumulated; and,
  • You will often have a lower payment each month.

Is Debt Consolidation the right option for you, or is there a better solution?
Find out from a Licensed Insolvency Trustee. Book a free consultation now, and at a location close to you.

How can I get a debt consolidation loan in Canada?

Apply to a bank, or other lender, with enough support to make them feel confident that you will repay the loan. To Review your Debt Repayment Optionsmake your case, you will need to provide:

  • 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.

How can you Consolidate your Debt in Canada?

Your first step is to apply to your bank or financial institution to see if you qualify for a consolidation loan. When determining if you qualify for a debt consolidation the bank will look at your credit score, your debt service ratio and your employment status. They are looking to see if you can afford to pay for the consolidation loan you are seeking.

To make the application process easier you should bring the following information to the meeting:

  • Your most recent income tax assessment(s);
  • A recent pay stub;
  • Your current debt statements/ bills; and,
  • Any information about your assets.

What are the risks?

The main risk in consolidating your debt is it can be a Band-Aid solution. If all your available income is being used to keep the loan payments current, then there is no ability to put aside funds for emergencies and savings. This means that if something should come up unexpectedly there is still a reliance on credit to cover the expense. Debt starts to increase again and those debt obligations are on top of maintaining the loan. This can lead to a financial crisis where your situation is worse than it was when you sought the consolidation loan.

If you put up an asset as collateral, such as a car or house, you are at risk of losing that asset should you find yourself unable to make the consolidation loan payments.

Since there is risk involved it is recommended that you consider all your debt consolidation options before committing to the loan agreement.

What if I get turned down for a Consolidation Loan?

It is not uncommon for a bank or lending institution to deny your application for a loan. Often this is because the debt level is too high and the bank does not want to take on debt from other banks. It could also be that the loan payment is too high in comparison to your monthly income. Or perhaps the years of juggling payments have already started to affect your credit rating.

If you get turned down for a debt consolidation loan it is time to consider alternatives including filing a consumer proposal. A consumer proposal is a settlement arrangement offered to your creditors that stops the interest and allows you to make one monthly payment you can afford. Consumer Proposals are filed through Licensed Insolvency Trustees.

When visiting a trustee in your area they will also look at the option of bankruptcy vs a debt consolidation.

This will make sure that whichever option you choose to deal with your debt you have been provided all the information needed to make an informed decision, with the help of a licensed professional.