Debt consolidation loan

Debt consolidation is done through a loan from your financial institution used to pay off all your other debts. In effect, the new loan replaces the old debts.

Why consolidate your debts?

There are 3 main objectives for debt consolidation:

1. Reduce the interest rate paid
2. Reduce the number of monthly payments
3. Force you to repay within a maximum timeframe

Let’s take a detailed look at each of the main objectives of debt consolidation:

1. Reduce the interest rate paid
You should only include debts with interest rates higher than that of the consolidation loan. Currently, interest rates for this type of loan range between 12% and 15%. Usually, only credit card debts have higher rates. It is therefore best to avoid including personal loans or lines of credit with lower rates and better to continue paying them separately.

2. Reduce the number of monthly payments
The more accounts you have to pay, the higher the risk of missing payments. By reducing the number of payments, managing your finances becomes simpler.

3. Force you to repay within a maximum timeframe
It’s well-known that if you only make the minimum payment on your credit cards, it will take a very long time to pay them off. For a $10,000 balance, for example, it could take 13 years to pay it off completely. When you consolidate, you must repay your loan within a maximum of 5 years. Although the payments are slightly higher, you’ll save nearly 50% on interest costs, and you’ll have cleared your debts within a reasonable time.

The positive points of debt consolidation

When possible, debt consolidation is an excellent way to manage your debt. It:

• Forces you to repay your debts within a maximum of 5 years.
• Reduces your payments to one per month, making it easier to manage.
• Allows you to maintain your credit history.

Here are some tips for debt consolidation

• Only consolidate debts with an interest rate equal to or higher than the interest rate of your consolidation loan (between 12% and 15%, depending on the financial institution’s risk assessment).
• Before applying for a consolidation loan, calculate with our tool what your monthly payment will be. To do this, take the total amount you need to repay the debts you want to consolidate, assume an interest rate of 14% (a loan will vary between 12% and 15%) for a period of 5 years. Make sure you can make the monthly payment because consolidating won’t help if you experience as much financial difficulty after consolidation as before.
• Ensure that the financial institution doesn’t require a co-signer (or guarantor). In our experience, payment defaults almost always result from a lack of ability, not a lack of willingness. By refusing to provide a co-signer or guarantor, you avoid putting a friend or relative at risk. Also, simply co-signing for someone is considered a loan for the co-signer and, as such, can harm his/her borrowing capacity.

For any questions regarding debt consolidation, please don’t hesitate to contact us at 1-877-777-2433.