Debt Consolidation

Debt consolidation involves requesting a loan from your financial institution to pay off the debts that would wish to consolidate. This loan allows you to regroup all your monthly payments in one single payment and, by consolidating the debts with a high interest rate, to reduce your interest costs.

This could be a good option for you if:

1. You have debts with a higher interest rate than your consolidation.
   Such a loan typically has a rate between 12% and 15%, depending on your credit risk. If you have credit cards with rates of 20%, for example, debt consolidation is clearly a good choice. HOwever, if you have a personal loan at 7% interest or a credit line at 11%, it would be better to consider another solution. The goal is to reduce the interest fees you pay each month, not increase them!
2. You can afford the loan’s monthly payment.
   A consolidation loan will normally last for 5 years. Make sure that you will be able to afford the monthly payment without too much effort. If you struggle just as much to make ends meet after consolidation as before, it is not worth it.
3. Your financial institution does not require a co-signer.
   If they fear that you might have problems paying off the consolidation loan, the bank will ask for a guarantor (someone that will guarantee payment if you default).  If they do, this should be seen as a red flag. If the bank has doubts on your financial capacity, maybe you should too. The last thing you want is to involve a loved one in your financial affairs.

If you meet all these conditions, debt consolidation could be an interesting option for you. If you want to find out more, please do not hesitate to contact a personal finance advisor at Jean Fortin.

Here are 4 criteria on which your request will be evaluated when applying for a loan:

1. A good credit rating (R-1 or R-2) for each creditor.
2. An overall credit score ranging from moderate to high (usually over 680).
3. A debt ratio below 40%.
4. Stable job.

Past payment delays on your debts remain on your credit file for 6 years, and although they heavily influence your score, they will have less impact with time. We recommend always checking your credit report before applying for a loan to ensure it does not contain errors that could reduce your chances. Additionally, we strongly advise calculating your own debt ratio using the debt ratio tool. A debt ratio exceeding 40% is a sign of over-indebtedness that might prevent you from having access to new credit and that will require debt reduction measures.

If you have questions or need help, do not hesitate to contact a personal finance advisor for Jean Fortin.

Debt consolidation is a loan you obtain from a financial institution to merge all your debts into a single loan.

Firstly, you need to:

1. Check the interest rates of your debts.
   Ensure that all the debts you are consolidating have an interest rate higher than the interest rate of your consolidation loan (between 12% and 15%, depending on your credit risk). The aim is to reduce your costs, not increase them.
2. Ensure that you will be able to make the monthly payment required by the financial institution.
   Use our Loan Calculator tool to find out how much your loan would cost you. There’s no point in consolidating if you face as much financial difficulty after consolidation as before. To determine if you would be able to handle such a payment, create your budget.
3. Ensure that the financial institution does not require a guarantor (co-signer).
   If it does, it indicates doubts not concerning your willingness to pay but rather about your financial capacity. And the last thing you want is to burden someone close to you with your debts.

All financial institutions offer consolidations, but since this type of loan carries more risks than a regular loan, they may be more demanding in terms of eligibility requirements.

Keep in mind that you would be better off consulting first with the financial institution you already deal with, as they have a better understanding of your payment habits.

Furthermore, remember that a bank is less inclined to assume the debts of another institution. Indeed, the one that already holds the most debts is already “at risk,” and therefore, it is advantageous for them to help you reduce your costs and improve your repayment capacity rather than a “new” institution.

When a financial institution grants you a loan to purchase an asset, your balance sheet (total of your assets and debts) remains the same because the loan is offset by a new asset, as is the case, for example when you purchase a car. Thus, when you purchase a house worth $300,000, the mortgage you have taken out is offset by an additional asset of $300,000 (the value of the house) on your balance sheet.

In the case of a consolidation loan, the financial institution lends you money not to increase your assets, but rather to simply repay your debts. The bank is supporting alone the risk that your previous creditors had.

Furthermore, once your debts are repaid with the consolidation loan, there is no guarantee that you will not incur new debt. Any such debts would be in addition to your consolidation loan, exposing you to financial difficulties. The bank granting you a consolidation loan is therefore taking on more risk and the higher interest rate is there to compensate for that.