Debt consolidation is an inexpensive solution to remedy your debt problems. As the name suggests, debt consolidation involves grouping all the money you owe in one place. Usually, you accomplish this by borrowing a sum of money from a bank, a credit union, or any other financial institution and using these funds to pay off all your other debts. 

Once your debts are paid off, you will have to repay the amount you borrowed to the bank. Though you still need to make this repayment, consolidation simplifies the process. You only have to pay one creditor instead of many, and you may be able to obtain a lower interest rate. 

Taking on a new loan is a necessary evil because it will simplify your repayments and could lead to lower interest payments. When you owe multiple creditors, putting all these debts into one consolidation loan can make the monthly payments more manageable and save money in the long run due to less interest.

The process of debt consolidation is simple. Here is an example: Let’s say you combine all your debt from credit cards, utilities, car loans, stores credit, business loans, and other sources, and the sum is $20,000. To consolidate your debt, you would get a loan from a bank or credit union for $20,000 and use the money to pay off all your other creditors. 

You are taking on new debt for yourself by doing this, but you pay off everyone else, which is a huge step that will help ease your financial burden and simplify repayment.

This loan is called a consolidation loan. Most banks offer this type of financial product to their customers. To start the process, you make an appointment with a financial advisor to assess your situation and determine the amount you will be able to pay per month. This step is essential so that you do not exceed your budget. Once you take out the consolidation loan and pay off all of your debts, all you have to do is pay off the loan to your bank by making regular monthly payments.

The consolidation loan works like any other type of loan, so interest gets added to the monthly payments. In general, banks do not lend money without interest. This is one of the main disadvantages of debt consolidation compared to a consumer proposal.

A consumer proposal, on which we have a different set of frequently asked questions, allows you to freeze interest payments. As soon as the Office of the Superintendent of Bankruptcy (OSB) accepts the consumer proposal, interest stops accumulating. However, this solution affects your credit score and your ability to borrow, so it is only best for people with unmanageable debts. 

The amount you will need to pay on a consolidation loan each month depends on the amount of debt and your ability to repay. In other words, it can vary depending on your budget and your income. You need to make sure that you choose the correct monthly payment amount, as skipping a debt consolidation payment can lead to financial issues such as higher interest payments and a risk of default. 

The maximum repayment term for a debt consolidation loan is five years, which means that you must be able to repay your loan to your bank within that time frame to use this option. Otherwise, it will not be possible.

You can also opt for faster repayment – three years instead of five, for example – if your budget allows. Quicker repayment will decrease the interest you will have to pay on the consolidation loan. You will be able to choose the length of your loan, and you can make a larger monthly payment if your financial situation improves along the way. 

If you can’t repay the loan in five years (if the amount of your debts is too high, for example), other options are available to you, such as the consumer proposal and bankruptcy. These debt consolidation alternatives have advantages and disadvantages, and our Licensed Insolvency Trustee will be able to help you understand the differences between these two options and advise you which of the two is best for your situation.

There are several advantages to using debt consolidation to get your finances in order. First of all, this is a free and easy-to-use solution. It costs nothing, and it allows you to manage your debts by combining them in one place. It simplifies your finances and makes your life easier by exposing you to one lender instead of many.

If you choose this option, you will have only one payment to make per month instead of multiple payments with varying interest rates on different days. By consolidating all of your debts in one place, you will only have to consider one interest rate. 

Another significant advantage of using this option to settle your debts is that you will no longer have to receive communications (calls, reminder emails, and so on.) from your creditors. This will release some of the financial and psychological pressure from your debts.

You will only have to deal with your bank when you get a debt consolidation, so you will not need to have the stress of dealing with different lenders. 

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The interest rate will depend on your credit score and your financial institution. However, it is rarely more than 12%. The interest rate is generally lower than what credit card companies offer, so it is often worth paying off your credit card debt through a consolidation loan.

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One of the significant advantages of using this solution to solve your debt problems is that the monthly payments are typically lower in a debt consolidation loan. You only have to make one payment with one interest rate.  

In some cases, the interest rate offered on a consolidation loan may be higher than what you are already paying. For example, if the interest rate on your credit card is 9.9% and the interest rate offered by your bank is 12%, debt consolidation may not be the best option. Therefore, you must make sure to weigh the pros and cons before taking any steps to get this kind of loan. Every situation is different, and debt consolidation is not a one-size-fits-all solution.

No, debt consolidation does not damage your credit report, which is a considerable advantage. A consumer proposal and bankruptcy both put an R-9 rating on your credit report. This rating is the lowest possible on a credit report. When you use these options, R-9 may remain there for up to seven years following the conclusion of the proceedings. 

No such mark appears in your file with a debt consolidation loan. However, you need to make sure that you can make your monthly payments on time; otherwise, your credit rating will be affected. A missed monthly payment on a loan has the same negative effect on your credit history as any other missed debt payment. If you cannot make your payments on time, the next step will be a consumer proposal or bankruptcy. 

Another danger associated with consolidating loans is the temptation to create new debts and justify them by telling yourself that you only have one loan to pay off. You should avoid falling into this cycle because it will lengthen the amount of time to repay your debts. 

To ensure that debt consolidation is the right solution for you, you need to be sure that you can make payments on time and not create new debt. By being disciplined, you will be able to pay off your debts without harming your credit score. Also, you’ll often save on interest payments, which will speed your financial recovery. 

In principle, anyone can apply for debt consolidation. However, not all requests are accepted. Debt consolidation involves borrowing money from a bank, so you must apply for a loan. Depending on your financial situation or your credit rating, your application may be refused, just like any other loan. 

If you have a bad credit history or already owe too much money, your bank may deny your request. If this happens, you can move on to two other solutions to debt problems: consumer proposal or bankruptcy.

If you’ve applied for a consolidation loan before and made all of your payments on time, there’s a good chance the application will be successful. The bank will see that you have always made payments on time. Likewise, if you have a credit score of R-1 or R-2, your application should be accepted without a problem, as these are the two best scores a person can have.

To apply for a consolidation loan, you will need to prove that you have a good credit history and a stable income. These are the two conditions you need to meet to ensure that you have a better chance of being accepted.

In short, debt consolidation is for people who have a good credit history and a stable income. People who are unemployed or have a bad credit history may not be able to apply for a consolidation loan and will have to look to other alternatives if they are in debt.

Usually, a bank will be willing to lend you money if you have a stable income sufficient to cover the loan’s repayment. Having proof of income, a good credit score, and a debt ratio of less than 40%, you have a good chance that your bank will accept your application. Owning assets (such as a house or a car) can also help your situation, especially if you have paid for them in part or in full. When you provide this evidence to a bank, it proves that you are solvent and have a history of repaying your loans.

Being solvent means you can pay off your debts as they become due. A credit score measures your repayment performance. The good news is that your credit score gets assessed continuously and updates based on your payment history. Because of this, there are many chances to improve your score.

There are specific tips to improve your credit score after consolidating a loan, declaring bankruptcy, or submitting a consumer proposal. Our Licensed Insolvency Trustee will be able to assist you in this process and give you the advice to achieve a better credit score.

Depending on your debt ratio after your application, you may or may not be able to borrow more money or make other loan requests. A financial advisor will be able to tell you whether you can borrow funds after consolidation or not. Each situation is unique, so the best course of action is to speak with an advisor before deciding anything. 

Depending on your financial situation, some banks may require that you have a co-signer for the loan. Other institutions may ask that you provide an asset as collateral to secure repayment of the loan.

Before choosing a co-signer for the loan, make sure they understand that they will be responsible for repayment if you cannot make the monthly installments. Be sure to weigh the possible consequences that this type of agreement could have on your relationship with the co-signer before making such a decision.

An alternative could be to sell expensive items as a way to ease your financial burden. This step could be a better solution than asking someone to be a co-signer or putting up property as collateral. 

Probably the biggest challenge with consolidating debt is finding a bank that will lend you money and getting a reasonable interest rate. The downside of this solution is limited since the consolidation doesn’t negatively affect your credit report. However, it would be best if you stopped creating new debt after getting a consolidation loan. You shouldn’t open new credit card accounts or apply for additional loans. So while using this solution, you need to be careful and responsible and ensure that you do not continue to take on debt. 

If you are struggling with debt and consolidation is not the right solution due to a low credit score, the inability to make necessary monthly payments, or any other reason, there are other alternatives for you to get rid of your debt. One of these options is a consumer proposal.

A consumer proposal involves making a payment agreement with your creditors and repaying your debts over a term of up to five years. To make such a request, you must make an appointment with a Licensed Insolvency Trustee. It is mandatory to enlist the help of a trustee when filing a consumer proposal. They will take care of all the steps for you, including negotiating with your creditors and filing the necessary documents. 

If this solution is no longer possible because of an inability to pay or high debts, you can opt for bankruptcy. Bankruptcy involves settling your debts by liquidating your assets.

If you opt for this solution, you will lose some property, but you will keep some of your possessions. The items you can keep are those that are necessary for life, such as your furniture, your kitchen equipment, your clothes, and the tools needed for your work. Our Licensed Insolvency Trustee will tell you, after a free consultation, if bankruptcy is the best solution for your needs.

Whatever solution you and your advisor choose, remember that it is possible to rebuild your credit after bankruptcy and that it is important not to lose hope. Many people have gone through this process in their lives and managed to get out of it. Our role as a Licensed Insolvency Trustee is to help put your finances in order so you can get a second chance and make your dreams become reality.