What is a debt consolidation?
The term debt consolidation usually refers to a consolidation loan that aims to consolidate several debts into one in order to have a single payment and reduce the interest rate.
This type of loan may or may not be secured by assets, such as a residence. Some lenders will also require an endorser or co-borrower to reduce the risk that the obligations under the debt consolidation loan will not be met.
When you search the internet for debt consolidation, you will find the following types of loans:
- The unsecured debt consolidation loan granted by a financial institution
- A debt consolidation loan secured by a 2nd mortgage on your home
- A mortgage refinance that will allow you to pay off several debts by increasing the balance of your first mortgage
The debt consolidation loan, is this a good solution for you?
It should first be noted that an unsecured debt consolidation loan is a term loan and not a revolving loan. That is, the loan balance decreases at all payment periods until it reaches $ 0.
It is therefore important to ensure that you have access to an emergency contingency fund before moving forward with this solution.
Usually, the consolidation loan is a good solution for a person who has clearly identified the sources of his debt and for whom his financial capacity and income stability will allow him to meet his payment commitments.
The credit file must still be good enough to be able to negotiate a debt consolidation loan agreement bearing a reasonable interest rate.
How to do a debt consolidation?
Before you go to the financial institution to apply for a debt consolidation loan, make sure you are well prepared. Have made a budget over a period of one to five years to ensure that your financial capacity is sufficient to meet the repayment agreement.
We must not forget to take into account irregular expenses and unforeseen expenses. In the analysis of your file, we will consider your credit file, your income stability, your assets and your debt ratio.
Generally, the financial institution to whom you owe the most, will be the one most inclined to grant you an unsecured debt consolidation loan.
It is also likely that in this case, the financial institution will only agree to consolidate the debts to it as part of a debt consolidation loan. If so, this option may not solve your debt problem.
If your debt is scattered with several lenders, an asset-less consolidation loan with a guarantee and no endorser could be almost impossible.
If you are offered an unsecured debt consolidation loan with a term of more than five years and an interest rate greater than 14%, it would be wise to review the details of the offer with a financial advisor. independent before accepting.
In the case of a consolidation loan guaranteed by your residence, it would be wise to consult a mortgage broker to make you advise well. Be careful that the debt consolidation loan is not a step towards a deterioration of your financial health.
What if the consolidation loan is refused?
If the financial institution has refused you, we invite you to consult us to assess your financial situation. We will also discuss other options and compare with the consumer proposal.
You benefit from free information and advice by contacting us. Do not hesitate!