Debt Consolidation Loans

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Debt Consolidation Loans

Are you having trouble keeping up with all your debt payments? If yes, you should consider using one of the many debt relief options available to Canadians. Some common debt relief solutions include debt consolidation, debt management, debt settlement, a consumer proposal and in extreme cases bankruptcy. Depending on your situation, one solution will provide better financial relief than others. If you’re looking for a less severe option, then a debt consolidation loan will be your best choice.

How Does a Debt Consolidation Loan Work?

Debt consolidation is achieved by grouping all of your smaller debt accounts and paying them off with one larger loan. The goal of a debt consolidation loan is to:

  • Streamline all your debt payments into one affordable fixed installment loan. Thereby simplifying your payments so that you can better track your debts and where your money goes.
  • Save money on interest by consolidating all your debt with a loan that has a lower interest rate.
  • Tackle your debts on your own and have a sense of accomplishment
  • Have peace of mind that you’re working towards a debt-free life

What Type of Debt Consolidation Loans Are Available to Canadians?

There are a few ways you can consolidate your debt. Depending on the type of method you choose, it will come with its own advantages and disadvantages.

Leverage Your Home’s Equity

If you currently own a house then you can use your home’s equity to consolidate your debt. Your home’s equity is the portion of your home that you actually own. This means that if your home is worth $250,000 and you’ve paid off $100,000 of your mortgage, you currently have $100,000 worth of equity in your home.

You will use your house’s equity, as collateral, to gain access to your equity (the $100,000) to consolidate all your debt under one new loan. This is obviously only an option for those who have a mortgage and own a house but it can be a great option for someone struggling to get their debt under control. However, it’s important to remember that, if you’re unable to make your payments your house can be seized as collateral to pay off your debt.

Credit Card Balance Transfers

If you’re particularly struggling with a lot of credit card debt. You can opt for a credit card balance transfer. This form of debt consolidation allows you to consolidate all your credit card debt by transferring your balances to a new credit card with a very low rate. Typically credit card balance transfers have rates that start as low as 0% for a period of time (usually between 3 – 6 months). This can save you a lot of money on interest but, if you’re unable to pay off your debt during the introductory period, you should consider consolidating using a personal loan.

Choose a Personal Loan

A personal loan has higher rates than a balance transfer but comes with much longer terms. This in turn will make your monthly payments more affordable and give you the time necessary to pay off your debts. However, in order to qualify for a big loan amount with a low-interest rate, you’ll need to have a good credit score and an income large enough to pay off your new payments. You can also improve your chances of securing the loan by offering some form of collateral like a car.

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Advantages of a Debt Consolidation Loan

Here are some of the advantages that come with taking out a debt consolidation loan; they should help you make the best choice for you and your financial situation.

  • Your payments will be fixed installments that are affordable and easy to remember.
  • Often you’ll be able to consolidate at a lower interest rate.
  • You’ll know the exact amount of time it’ll take to pay all your debts off
  • Services charges and extra fees are typically very low
  • You’ll build credit with each on-time payment.

Disadvantages of a Debt Consolidation Loan

While a debt consolidation loan is a great option for many consumers, this option is not without its disadvantages. Here are some of the disadvantages you should know about before you make any decisions.

  • Collateral or a cosigner is often required
  • A decent credit score is not required but is definitely a plus
  • An unsecured debt consolidation loan can come with a high-interest rate
  • You’ll still have to pay off the full amount debt you owe; you’re simply making it easier on yourself

Did you know that there are more than 20 ways to secure a loan?

What Are Your Chances of Being Approved For a Debt Consolidation Loan?

Like with all loans and financial products, it all depends on your unique situation. But, there are things most lenders are looking for, which can help you be prepared when applying for a debt consolidation loan.

If you approach a bank for a debt consolidation loan you’ll need to meet the following requirements:

  • Not have an excessive amount of late payments on your debts
  • No big black marks on your credit report, like credit accounts that are in collections
  • You have an income that’s high enough to handle the loan
  • You don’t have an astronomical amount of debt

We know most of those requirements seem intimidating. But the good news is that getting a debt consolidation loan from a bank is only one of your options. You could instead look into getting a personal loan from a private lender or even ask someone to co-sign a debt consolidation loan.

debt management options

When Should You Consolidate Your Debt?

Choosing to consolidate your debt is a big decision, that’s why it’s important to know exactly what’s going on with your finances; here are a few steps you should take before you make any final decisions.

  • First, you need to identify the cause of your increasing debts.
  • Take a look at your debt-to-income ratio, this is the ratio between how much debt you have and how much money you bring in.
  • Don’t forget to also take into account the ratio between your monthly income and your monthly credit card bills.

Once you’ve determined what the main source of your debt is, you need to figure out the best course of action to get your finances back on track.

  • First determine how long it will take you to pay off your debts if you continue to only make the minimum monthly payment.
  • Now try to create a budget that will allow you to both pay for your daily necessities and make debt payments that are more than the minimum required.
  • If you are unable to create a budget that works then you probably need to consider debt consolidation as an option.

Everyone’s financial situation is different, which means that a debt consolidation loan may not be the best option for you. But, if you feel as though you could benefit from a debt consolidation loan and are interested in learning more, we can help. 

Frequently Asked Questions

Can I get a debt consolidation loan with bad credit?

It can be very difficult to get a debt consolidation loan when you have bad credit. This is especially true if your debt to income ratio is also very high. However, you may still be able to get a loan if you provide some collateral or a cosigner.

Will a debt consolidation loan hurt my credit?

A debt consolidation loan can temporarily hurt your credit when your lender performs a credit check during your application process. However, in general, a debt consolidation loan can build your credit because the debt accounts you consolidate will be considered as paid. Moreover, every time you make full on-time payments your credit will positively impact your credit.

What kind of debt can I consolidate under a debt consolidation loan?

Credit card debt, payday loan debt, lines of credit, utility bills and other unsecured debts can be consolidated.

Finding The Right Debt Consolidation Loan

Choosing the right debt consolidation loan and the best lender can seem intimidating, but the good news is Loans Canada can help by matching you with multiple offers based on your wants and needs.

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