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What is debt consolidation?

Article updated on 19/08/2019
Bills are piling up and you’re stuck juggling all the payments you owe week after week? Do you sometimes even forget some? It might be time to think about debt consolidation. This is an easy way to simplify your finances and pay down your debts without hurting your credit rating.

Summary

What is debt consolidation?
  • Debt consolidation means combining all of your debts and paying off a single loan. It’s a way of simplifying your finances.
  • You’ll take out the loan from a financial institution. The interest rate will typically be lower than that of your other debts, especially if most of your debt is from credit cards.
  • Consolidating your debts doesn’t affect your credit rating, as long as you make your monthly payments on time and never miss any.

What exactly does it mean?

The idea behind debt consolidation is simple: the bank grants you a loan to pay off all your debts at once. From this point on, you make one payment a month. The interest rate is also lower than on the debts owed to your previous creditors.

There are several advantages to consolidating your debts:

  • It makes your life easier, with just one monthly payment to make
  • You only have one creditor, the bank—your other creditors will be paid off and leave you alone
  • You save on interest fees
  • Your new monthly payment is lower than the total of your old debt payments combined
  • Your consolidation loan will be paid off faster, since the interest rate is lower
  • Your credit rating is unaffected, as long as you pay on time

Is debt consolidation for you?

Debt consolidation is a solution to consider if you’re overwhelmed by your many payments, to the point where you’re having trouble keeping track of them.

If you pay a lot of interest (for example, you have several credit cards with a rate of 19.9%), consolidation might also be your best option.

Banks will grant you a debt consolidation loan as long as you have adequate, stable income. If you have assets, like a house or car that’s partially or fully paid off, this can also tip the balance in your favour.

Of course, a good credit rating is also necessary to qualify. After all, it’s a bank that’s granting your debt consolidation loan. Before giving it to you, they’ll want to know if you’ve had trouble paying back loans in the past.

Debt consolidation isn’t the right solution for everyone

You’re unlikely to qualify for debt consolidation if your credit rating has taken a hit. For example, if you’ve run into problems and missed payments in the past.

Banks will also be hesitant to grant a loan if you don’t earn a stable income, or if it’s on the low end. Or if your debt load is very high.

So there are a few reasons you might be denied a debt consolidation loan.

On the other hand, the bank might grant you the loan even if you don’t meet the criteria, on the condition that you put up assets as collateral or find a guarantor. Before asking someone close to you to be a guarantor, however, consider the following question: how will I feel if I can’t make my payments and a person I care about has to do it for me?

What you need to look at before considering debt consolidation

Before consolidating your debts, keep the following recommendations in mind:

Make sure the interest rate and payment term offered are really reasonable and favourable to you.

Be sure you can make the consolidation loan payment. It’s not enough to want to. You have to crunch the numbers.

Once your consolidation loan has been granted, make every effort to be disciplined and avoid new debts.

Not convinced?

If you’re not sure debt consolidation is the best option for you, you can talk to a counsellor in financial recovery. They’ll analyze your situation and guide you toward the best solution to get out of debt. There are alternatives, and not just bankruptcy.

Make an appointment today.