What is Consolidation Loans/Debt Consolidation?
If you are juggling multiple payments and finding it hard to keep track of them, a consolidation loan — combining all your debt into one loan with one payment — can help you manage and organize your payments. Lenders will look at a few factors when evaluating your eligibility for a consolidation loan: your credit card balance(s), credit report, and current income. If any of these indicators are not within their preferred range, they may decide against offering you the loan.
If you’ve rarely missed a payment for your debts, consider applying for a consolidation loan, as your credit is likely still in good standing. Major banking institutions are more likely to offer lower interest rates than second tier and third tier institutions.
If you are considering a consolidation loan, be careful that you are not simply swapping multiple high-interest rate loans for one combined loan with the same (or higher) rate.
Is a consolidation loan right for me?
Just looking at the monthly payment will only tell you part of the story. Understanding the cost of borrowing (the amount of money you will pay in interest over the term of the loan) is a key to understanding whether a debt consolidation loan will work for you. It’s also important to look at how long it will take to pay off the loan. A monthly payment of $300 sounds reasonable until you find out it will take you 10 years to pay off your loan.
If you find that you can’t afford a consolidation loan payment, you may consider a settlement option, such as a consumer proposal. With consumer proposals, you will still get the advantage of spreading out your payments, but you’ll also get the advantage of a more affordable payment, as you will only pay a portion of your total debt. The disadvantage of a consumer proposal, however, is that your credit rating and score will be adversely affected, whereas there would be no negative impact to your credit rating in a consolidation loan, because you have essentially paid off your debts and replaced them with a consolidation loan. Provided your ongoing payments for the consolidation loan are made on a timely basis, you can maintain a good credit rating moving forward.
If you have a lot of debt owing to the CRA, a consolidation loan may not the best option for you. As a general rule, banks do not consolidate debt outstanding to Canada Revenue Agency. In this case, a consumer proposal may be a better option for you; besides bankruptcy, a consumer proposal is the only process where you can settle Canada Revenue Agency (CRA) debt such as GST and income tax.
Advantages of a consolidation loan
- You can take all of your high-interest debts and consolidate them into a lower interest rate.
- You will have an easier time paying and keeping track of your debt.
- You will be better able to keep a good credit score/rating.
Would you like to pursue this option?
No sell and no pitch, just real help. Let’s talk about this option and double-check that it is the right one for you.
Debt Consolidation FAQs
Is debt consolidation a good option to relieve my debt?
It is very important to cut up and cancel the credit cards and loans that were included in the consolidation loan. This will help your success in payoff of your debts. If you fail get rid of the extra credit, you might fall into the trap of reloading those credit cards and end up being unable to pay them off, putting yourself in a far worse situation.
I applied for a consolidation loan, but the bank refused to give me one. Why?
How does debt consolidation differ from a consumer proposal?
A consumer proposal is based on your ability to pay as determined by the bankruptcy - the amount payable into the consumer proposal will vary significantly from person to person based on their individual information. There is no interest charged on a consumer proposal.
A consumer proposal is the only process – besides bankruptcy – where you can settle Canada Revenue Agency debt such as GST and income tax.
Debt consolidation does not settle your debts for less than you owe – you would be paying all of your debts off with the consolidation loan and then maintaining a consolidation loan moving forward. The interest charged on a debt consolidation loan will vary from person to person. It is important to review the terms of the agreement as it will impact the total amount payable.
There would be no negative impact to your credit rating because you have paid off your debts and replaced them with the consolidation loan. Provided your ongoing payments for the consolidation loan are made on a timely basis you can maintain a good credit rating moving forward.
As a general rule, banks do not consolidate debt outstanding to Canada Revenue Agency.