Debt consolidation loan

In summary:

• Debt consolidation involves combining multiple debts into a single loan to simplify payments and often reduce interest.
• It is particularly beneficial for high-interest debts, such as credit cards, and allows for faster repayment with a fixed schedule.
• To qualify, you generally need a good credit score, a reasonable level of debt, the financial ability to repay, as well as stable employment and residence.
• It is not always possible or ideal: high interest rates or a denial may require considering other solutions, such as a consumer proposal.

Debt consolidation involves asking your financial institution for a loan to pay off all your existing debts. The new loan then replaces your previous debts.

Why consolidate your debts?

When possible, debt consolidation is an excellent way to deal with debt. It offers the following 4 advantages:

1. Reduce the interest rate paid
   If you only consolidate debts that have a higher interest rate than the consolidation loan, you will reduce your interest costs. Currently, interest rates for this type of loan range between 12% and 15% (depending on the quality of your credit file). In many cases, only credit card debts carry higher rates. You should avoid including personal loans or lines of credit, as they usually have lower interest rates. It is better to continue paying those separately.
2. Reduce the number of monthly payments
   The more accounts you have to pay, the higher the risk of late payments. By reducing the total number of payments to your creditors, managing your finances becomes simpler.
3. Set a maximum repayment period
   It’s well known that if you only make minimum payments on your credit cards, repayment can take a very long time. For example, a $10,000 balance can take up to 10 years to repay in full. With consolidation, you must repay the loan within a maximum of 5 years. Although the payments may be slightly higher, you can save nearly 35% in interest and have a clear debt repayment plan with an end in sight.
4. Helps maintain your credit score
   Debt consolidation can help preserve your credit score, as it avoids solutions like consumer proposals or bankruptcy, where creditors incur losses. By combining your debts and making regular payments, you demonstrate good financial management, which helps maintain, or even improve, your credit rating.

Eligibility criteria for a consolidation loan

• Debt ratio below 40%–44% (depending on credit profile)

  The first question a lending financial institution will ask is this: Will taking out the requested loan cause your level of debt to become too high in relation to your financial capacity? That’s why, when calculating your debt ratio using our Debt Ratio tool, you must include the monthly payment of the desired consolidation loan rather than the total of the monthly payments for the debts you wish to consolidate. To determine the monthly payment for the consolidation loan, use a loan calculator: enter the requested loan amount, an interest rate of 12%, and an amortization period (loan term) of 5 years.

  If your result is below 40%, congratulations, you meet the first criterion!

• A good credit history

  Your credit file is divided into 2 parts: the first covers your repayment habits for each of your debts over the past 6 years, and the second is your credit score. The score takes five factors into account to determine your overall rating, much like a school report card. It ranges from 300 to 900, and generally a minimum score of 680 is required to be eligible for a loan. For more information on this topic, feel free to consult our “My Credit File” section.

• Ability to repay

  In addition to your debt ratio, the lender will ensure that your personal expenses (excluding housing and debt payments) still leave enough room in your budget to repay the loan. Preparing a budget is essential to confirm this. On this subject, our budget section will offer you several tips.

• Stable employment and residence

  Having a stable job and not moving frequently works in your favor. Financial institutions value stability and predictability. However, they also understand that in today’s job market, people may change employers to improve their situation.