Understanding debt consolidation


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Understand the landscape of debt consolidation in Canada including who provides debt consolidation services and what the advantages and disadvantages are.

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Understanding debt consolidation

  1. 1. Understanding Debt Consolidation in Canada Is a debt consolidation loan right for you?
  2. 2. Table of Contents What is Debt Consolidation? How Do I Get a Debt Consolidation Loan? Advantages of Debt Consolidation Loans Disadvantages of Debt Consolidation Loans Alternatives to Debt Consolidation 3 8 9 11 2 4
  3. 3. What is Debt Consolidation? If you’re struggling with multiple debt payments, debt consolidation can help you combine your debt payments into one single payment. Not only does it help with debt management, but it can also save you money on interest. A debt consolidation loan is a personal loan that allows you to consolidate your credit card debt, line of credit, car loan, and similar debt, into a single loan. This way, you only have one monthly payment instead of multiple. 3
  4. 4. How Do I Get a Debt Consolidation Loan? Several forms of debt consolidation are available in Canada. The logical place to start is with a debt consolidation loan through your financial institution. You probably already deal with a bank: you deposit your paycheque at a bank, and you pay your bills through your bank account, so your bank is already familiar with you, your income, and your spending. Since they already know you, they are more likely to give you a debt consolidation loan. 4
  5. 5. How Do I Get a Debt Consolidation Loan? Your next option, if you own a house, is to try a different type of debt consolidation lender, such as a mortgage broker. A loan secured by a house is one of least expensive methods of borrowing possible; so, if you qualify, this is a good option. 5
  6. 6. How Do I Get a Debt Consolidation Loan? If you don’t qualify for a mortgage, you could try a finance company. However, finance companies charge very high interest rates, generally at least three times more than what a bank would charge. Only borrow from a finance company if you have no other option AND if you can afford the payments AND if all your debts will be eliminated in a reasonable period of time. 6
  7. 7. How Do I Get a Debt Consolidation Loan? There are also debt consolidation or credit counselling agencies in Canada that offer to help you consolidate your debts into one, easy payment. In effect, what they are offering is a debt management program or debt settlement. These debt consolidation companies will not give you a new loan, rather they will help you negotiate a plan with your creditors. Before you choose any of these options, consider all of your alternatives which we discuss on page 11. 7
  8. 8. Advantages of Debt Consolidation Loans Advantages of these loans include: • Easier debt management: only one monthly payment, making it easier for you to keep up with your debt payments. • The possibility of a lower interest rate, reducing your total debt repayment costs so you can eliminate your credit card debt faster. • Lower monthly payments when your interest costs are reduced and the term of the debt is extended. 8
  9. 9. Disadvantages of Debt Consolidation Loans • Not all debts can be consolidated. Credit card debt, utility bills, car loans and other personal loans can be consolidated, but mortgages cannot. • To qualify for a debt consolidation loan, you usually need to have fairly good credit and sufficient income to be able to pay the loan. • When you apply, your bank may ask to see: • Your monthly budget to determine if you can meet your loan payments. • Your most recent tax returns and pay stubs as proof of your income. • Your most recent loan statements showing exactly how much you owe. • Your credit report and any other debts and notes about your credit history. 9
  10. 10. Disadvantages of Debt Consolidation Loans • Depending on your credit, you may also need a co- signor or collateral, such as a car or a house. The bank may ask for an appraisal of the asset you will be using as security. • Unlike other debt relief options, you have no protection from your creditors, collection calls or wage garnishment. • You will not reduce the overall total of your debt. You risk building up more debt if you can’t make your payments or if you continue to use your credit cards. 10
  11. 11. Alternatives to Debt Consolidation Loans If your debt is too large for a consolidation loan to work, you may want to consider other programs that allow you to consolidate your debt, have one easy monthly payment, and help you get out of debt sooner. You have two options for doing this: A debt management plan allows you to repay your debts in full, but can often have interest costs and penalties forgiven. A consumer proposal allows you to pay back a portion of what you owe while being protected against legal action from your unsecured creditors. Both programs allow you to consolidate your debt into one, lower monthly payment. 11
  12. 12. Not sure which option to choose? www.moneyproblems.ca Click here to find a local debt expert who can help.