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While Prince Edward Island’s average consumer debt falls in the middle of the pack among Canadian provinces, that doesn’t mean that some consumers in PEI aren’t struggling with their debt levels. While many of us who get into debt can eventually find out own way out, that isn’t always the case.

Whether it’s low income, high-interest rates, or just too much debt, it’s rather common for individuals to need some assistance to get out of debt. Thankfully, Canada is home to several great debt relief options that can help a wide variety of people. One of the best and most common options is debt consolidation. If you’re looking for help concerning debt consolidation in Prince Edward Island, we have the information you need.

The Two Types of Debt Consolidation

Before looking closer at debt consolidation in Prince Edward Island and whether or not it’s right for you, you should be aware that there are actually two different types of debt consolidation, a debt consolidation loan and debt consolidation program.

Debt Consolidation Loan

A debt consolidation loan is a large loan what people will get to cover all of their smaller loans, in order to make payments simpler every month. So if you have 6 different eligible loan payments to make each month, you would take out one larger loan, pay off the others in full, and then simply pay back that one loan.

This type of loan makes it easier to handle your monthly payments and can also come with a lower interest rate, which will help you save some money in addition to simplifying your finances.

Debt Consolidation Program

In addition to a debt consolidation loan, you can also go with a debt consolidation program. With this method, you’ll work closely with a credit counsellor who will come up with a debt repayment plan and schedule, both of which will be tailored to your needs and the requirements of your creditors and lenders. You’ll then make payment through your counsellor who will disperse the money to your creditors based on the plan they created. Keep in mind that this method could potentially have a negative effect on your credit.

Good Debt vs. Bad Debt

While many people see all debt as negative and as something to be avoided, that isn’t actually the case. While this article has looked at some of the negative results that can come from debt, there are often plenty of positive that can come from debt as well. The reason for this is because there are generally two different types of debt, good debt, and bad debt.

Good Debt

Good debt is anything that is used to grow assets or to improve yourself or even your quality of life. This type of debt can be a wide variety of things including student loans, mortgages, or investments in your business.

Click here for a look at safe vs. risky investments.

Bad Debt

If the debt you have is not growing an asset or improving your life, it is often considered bad debt. Examples of bad debt are things like credit card debt and expensive auto loans. Generally, these are the types of debt that can really get people in trouble.

Of course, these are not set in stone and there are a ton of examples of when something that is generally good debt is seen as bad debt. For example, if you purchase a house for much more than you can afford, and become house poor, the debt can no longer be considered good debt.

How Do Debt and Debt Consolidation Affect Your Credit?

As you have likely seen throughout this article, debt has a huge impact on your overall financial situation and health. Another thing that is very important to your finances is your credit. Having good credit allows you to get cheaper loans, better terms, and simply makes borrowing much easier.

So how does having debt or going through debt consolidation in Prince Edward Island affect your credit? Well, it depends. It can either be really good, or really bad.

  • If you pay off debts on time and keep your utilization low, debt can help your credit score and report improve.
  • However, if you carry a lot of debt and miss payments on that debt, your credit will suffer.

A debt consolidation loan, on the other hand, is generally quite good for your credit. This is because you are completely paying off several accounts, which is seen as a good thing. Of course, if you end up defaulting or falling behind on your consolidation loan payment, it can end up hurting your credit.

Did your debt consolidation loan application get denied? Then check this out.

Of course, as mentioned before a debt consolidation program can potentially hurt your credit score, so simply be aware of that before going with that option. These programs will give you an R7 rating for 3 years, which will show up on your report that you are making regular payments but through a special arrangement.

Canadian Credit ScoreCheck out this infographic for even more information about credit scores.

Frequently Asked Questions

Can debt consolidation improve my credit score?

You may see your score drop initially. However, a debt consolidation loan will improve your credit score in the long run. Even more so if you have poor credit. According to TransUnion, 84% of borrowers with scores under 600 saw their scores increase by 20+ points after consolidating their debts.

What do I need to qualify for a debt consolidation loan?

Conditions for approval will vary depending on the lender and the product. However, be aware that most will not qualify you if you are already consolidating your debts through credit counseling, a consumer proposal, or bankruptcy. You’ll also need a steady income with a reasonable amount of debt compared to income. If you cannot qualify for a debt consolidation loan, then it might be time to look into a debt consolidation program where no new loans are involved.

When should I get a debt consolidation loan?

If you find that your debts are becoming less and less manageable, then you should consolidate them before it’s too late. The best opportunity to do so is while your debt-to-income ratio is under 50% and while you have a credit rating of around 600. You also have to be ready to commit to a budget. Accumulating more debt after you’ve consolidated existing debts will only make your situation much worse.

Debt Consolidation That Works For You

If you’re considering debt consolidation in Prince Edward Island or are simply interested in more information about the process, Loans Canada can help you find the best service provider for your needs.

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