Is Debt Consolidation Right For You?
Having a lot of debt increases your risk of defaulting on your payments and, as a result, can put a strain on your credit report. To facilitate the repayment of your debts, consolidation can be an interesting solution for you.
Debt consolidation gathers the debts into one payment per month. Usually offered at a lower rate than credit cards, consolidation loans can also lower your monthly payment.
According to the Government of Canada's Office of Consumer Affairs, debts you might include, but are not limited to these, are cards and lines of credit, utilities, and other loans related to consumer goods. Note that mortgages cannot be included in a loan for consolidation. Check with your financial institution to find out about all the eligible debts.
Who Can Do Debt Consolidation?
Wondering if your financial situation could benefit from debt consolidation? Here's a real-life example of how debt consolidation can help regain control over your finances. Annie is a 30-year-old professional who accumulates $ 20,000 in various debts, mainly credit cards, in addition to her student loans. She manages to pay the minimum required most of the time, but still feels like she can't get over it. She thinks she has to resort to the consumer proposal and try to find an arrangement with her creditors. She is even considering bankruptcy. During a meeting with a financial advisor, the latter suggests debt consolidation.
According to Éric Lebel, recovery advisor and partner at Raymond Chabot Grant Thornton, debt consolidation is an option for people with a good credit history. “Before you think about debt consolidation, it's important to make sure you're creditworthy,” he says.
Solvency, or insolvency, is the ability or otherwise of a person to pay bills and debts as they fall due. In his practice, Mr. Lebel meets many people who hope to enter into a debt consolidation agreement with a financial institution. "It is sometimes their last hope," he says.
How to apply for debt consolidation?
Above all, the bank assesses the risk you represent. It studies your credit report, your debt ratio, your repayment behavior and your ability to pay off your loans. "If the bank considers that you would have had trouble repaying the other creditors, it may not grant you the loan," notes Mr. Lebel.
Banks may require collateral through an endorser. “If you have a good job and equity in your home, for example, you might be a good candidate, depending on how much debt you have to consolidate,” he says.
Do you have the capacity to repay your debts?
To find out if debt consolidation is a winning option for you, you might start by assessing your ability to pay off the required loan for all of your debts. “You have $ 20,000 in financial institution and department store credit card debt at 19% and 29% interest rates. By consolidating these debts, even at a rate of 12%, the monthly payment will be lower and the amount of interest paid at the end of the term, less. So it's advantageous. », Explains Mr. Lebel. Paying less interest each month lets you get your finances back on track by paying off more principal.
Cost of credit cards (average rate 24%)
Cost of debt consolidation (12% rate)
Balance
$ 20,000
$ 20,000
Payment
$ 500 / month approximately (minimum required to cover principal and interest)
$ 445 / month
Time to repay (estimate)
6 years and 10 months
5 years
Interest paid at the end of the term
$ 20,637.97
$ 6,693.40
Example taken from Raymond Chabot Grant Thornton.
If you've been in financial difficulty and don't qualify for debt consolidation, you can apply for a second chance at credit. Repaying this loan conscientiously every month restores your credit report and increases your chances of getting a traditional loan or debt consolidation.
What to know before doing a debt consolidation?
If your credit history allows you to get this kind of loan, here's how you might benefit from it:
One payment.
The interest rate is generally lower than credit card rates.
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