Debt Consolidation – How Does it Work?

What Is a Debt Consolidation Loan?

When you owe money to many different lenders or accounts, it can be difficult to keep on top of the monthly payments. Debt consolidation is a way to consolidate many debts into one consolidation loan, with one monthly payment.

Having only one payment every month makes it easier to organize your budget and eases the burden of remembering the due dates of multiple monthly payments. When you consolidate debt, it can even save you interest, depending on the terms of the debt consolidation loan and how long you take to pay it off.

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
  • You will often have a lower payment each month

    Is Debt Consolidation the right option for you, or is there a better solution?
    Learn your options by visiting a Licensed Insolvency Trustee. Book a free consultation now, at a location close to you.
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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 make 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.

Bank requirements for consolidating debt

Once you have visited the bank or financial institution and provided the information listed above, the bank will check this and other factors to determine if you qualify for a debt consolidation loan. The bank will review 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 also bring the following information to the meeting:

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

What Are the Risks of Debt Consolidation?

The main risk in consolidating your debt is that you might be tempted to use the loan as a “band-aid” solution.

Often a debt consolidation loan, even though it provides the benefits list above, still strains a person’s budget to the point that there is no leeway for emergencies or unexpected expenses. If all of your available income is being used to keep the loan payments current, then you may still need to rely on credit to cover surprise expenses.

Debt begins to increase again and your new debt obligations (which are typically credit card balances) are a heavy burden on top of maintaining the debt consolidation loan. This can lead to a financial crisis in which your situation is worse than it was when you originally sought out the loan.

Even worse, if you have listed an asset such as a car or house as collateral for the debt consolidation loan, you are at risk of losing that asset should you find yourself unable to make the consolidation loan payments.

Since a risk is involved, we recommend that you consider all your debt consolidation options before committing to the loan agreement. A Licensed Insolvency Trustee is qualified to discuss your options with you.

What If I Am 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 your debt level is too great, or the required loan payment would be 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 are turned down for a debt consolidation loan, it is time to consider alternatives.

Learn About Your Alternatives to Debt Consolidation, such as Consumer Proposal

One alternative to debt consolidation is consumer proposal – a uniquely Canadian debt solution. 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 can only be filed through Licensed Insolvency Trustees.

A Trustee can also advise you on any other solutions that may apply to your particular situation, such as personal bankruptcy.  Visiting a Licensed Insolvency Trustee will ensure that whichever option you choose, you will have all the information you need to make an informed decision. Your first appointment with a Trustee is free, no-obligation, and confidential.

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