Debt consolidation in Canada
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What is debt consolidation?
Debt Consolidation is the result of combining all debts into one single new loan, with one monthly payment. Debt consolidation allows you to get a lower interest rate on all your debt combined, because you are buying a debt service plan in bulk and therefore you should be able to achieve a lower interest rate than through your individual loans.
How does debt consolidation work?
Debt consolidation involves rolling all your existing debts into one. Typically, you’ll need to secure a loan through a bank or other lender to essentially ‘buy’ the existing debts, before paying the bank or lender back in monthly instalments.
Dependent on personal circumstances, many people use consolidating debts as a way to manage multiple debts in one go and can be a viable option if you are able to make regular repayments. Debt consolidation is a method of restoring your financial circumstances
Is debt consolidation worth it?
There are several advantages to consolidating your debt, including:
- A lower overall interest rate on all your debt, which lowers your monthly payment and total interest and makes it possible to pay your debt off sooner
- Simplifying debt management with a single monthly payment
- You can keep your credit cards as a back-up in emergencies
- Your stress is reduced if you can make the required payments on time
- Your credit rating should not be affected (unless you are turned down for the loan)
- You can use your assets (e.g., your home) to reduce your interest rate further
Certain disadvantages come with debt consolidation loans, including:
- You must pay the debt in full;
- You will pay more interest over the long term;
- You will still have access to your credit cards, which could cause you further debt;
- You must be disciplined about making payments (or you could lose your collateral on a secured loan)
- You could damage your credit or the credit or a co-signer if you are unable to pay
Other debt solutions, such as a consumer proposal, will forgive some of your debt and allow you to pay less in total. If your interest rate is variable or it goes up at renewal, your debt could become unmanageable and you could be in a position where you end up needing to find another debt solution.
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What debts does debt consolidation help you get rid of?
Credit card debt is one of the most common reasons why people use debt consolidation, since credit cards have much higher interest rates than even an unsecured loan from a bank. Debt consolidation is an optional debt solution plan if you have:
- Credit card debt balances to pay, including retail store credit cards
- Other high interest consumer debt, such as a car loan from a finance company
- Multiple obligations with varying due dates, such as insurance payments, child support, student loan payments, etc.
Are you eligible for debt consolidation?
To qualify for a debt consolidation loan, you need to have:
- A regular income stream
- A reasonable level of monthly expenses
- An acceptable credit rating
Your payment history and credit score will be reviewed by the underwriters to assess your default risk before deciding whether to offer you the loan. If you can offer security or a co-signer, then the bank may be more willing to offer you a loan. Finding a co-signer is difficult as it makes this person’s credit vulnerable to damage.
How does a consumer proposal consolidate my debt?
A consumer proposal is a viable alternative to bankruptcy and can also reduce the amount of debt you pay back.
A consumer proposal is an agreement with creditors, outlining the percentage of the debt you owe them and allowing you to extend the amount of time you can pay back this debt.
The payments are made through the Licensed Insolvency Trust (LIT) which will pay the creditors on your behalf.
A consumer proposal has a number of benefits, which makes it an appealing form of debt consolidation, including:
- Avoid bankruptcy
- Reduce your debts
- Consolidate your debts into one monthly payment
- Maintain ownership of all your assets
You can also consolidate a number of different types of debt into a consumer proposal, such as: tax debts, student loans, bank cards and credit cards.
If you’d like to know more about consumer proposals and how they can help you manage your debts, you can contact us here for a FREE consultation today.
Frequently asked questions
Does debt consolidation affect credit score?
Unless you are turned for the loan you need to consolidate your debt and you manage to make regular and consistent monthly payments, debt consolidation should not affect your credit score.
How do I get a debt consolidation loan?
You can secure a debt consolidation loan from most banks or lenders as long as your credit history permits it.
What is an unsecured debt consolidation loan?
An unsecured debt consolidation loan is a loan that’s not backed by assets, comes with higher levels of interest and, in turn, can be more difficult to secure.
Can debt consolidation help with payday loans?
Like with credit card debt and student loans, debt consolidation can also help with payday loans by rolling the debt into one debt package.
Can I still use my credit card after debt consolidation?
Yes you can. Debt consolidation will allow you to continue using your credit card. But we advise using your credit card with caution as you consolidate your debt to avoid getting into further debt.
Does debt consolidation affect buying a car?
In short, debt consolidation won’t directly affect you buying a car.
However, debt consolidation will always impact your finances directly because you are required to make monthly payments. Ideally, you should consolidate your debts and pay them off before making other big investments, such as a home or car purchase.
If you’re able to comfortably make the monthly repayments required by a debt consolidation loan and afford a car, there is nothing stopping you from doing this though.
Does debt consolidation affect buying a home?
We advise exercising caution when considering buying a home while in the process of paying your consolidated debt. This is because debt consolidation loans operate on the proviso that you can commit to monthly repayments. By introducing more financial stress into your life, you could run the risk of struggling to make these repayments.
Ideally, you should consolidate your debts and pay them off before making other big investments, such as a home or car purchase.
Get in touch with Harris and Partners
If you need help from those who specialize in solving debt problems, contact us at Harris & Partners Inc. Licensed Insolvency Trustee. In Canada, our federally Licensed Insolvency Trustees can help you achieve long lasting financial solutions.
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