Debt Consolidation

Debt consolidation is a loan that you request from your financial institution to combine (consolidate) all or part of your debts. The money from this loan is used to pay your existing creditors. Having only the consolidation loan allows you to have only one monthly payment for a maximum period of 5 years. The loan generally will cost between 12% and 15% interest per year, depending on the credit risk you represent. The good news is that the loan has no impact on your credit report. Check out all our articles on debt consolidation. 

If the financial institution refuses to grant you such a loan or if the monthly payments are too much for your budget, a consumer proposal may prove to be a very interesting alternative. 

A consolidation loan aims to achieve 3 main objectives: 

1. Consolidate all your payments into a single monthly payment
   By having only one monthly payment instead of separate payments for each of your debts, it will be easier for you to manage and less risk of being late on some or many payments.
2. Reduce interest costs
   By consolidating debts that have a higher interest rate than the consolidation loan itself, you will save on interest costs. For example, a $10,000 balance on a credit card with a 20% interest rate will cost you $5,896 in interest over 5 years. In contrast, a consolidation loan will cost you only $3,346. That’s a significant difference.
3. Establish a repayment plan for your debts
   Typically, repayment of a loan extends over 3 to 5 years. For example, if you only make the minimum payment (3%) on your $10,000 credit card balance, you will pay $12,100 in interest, plus the principal, over a period close to 22 years, for a total of $22,100. With a consolidation loan, the monthly payment will be higher because you’ll have a maximum of 5 years to repay it. However, in the end, you’ll have saved $8,755 in interest costs. 

•  Debt level below 40%-42% (depending on credit history)
  The 1^st question the lending financial institution will ask is whether the requested loan will result in your debt level becoming too high compared to your financial capacity. Therefore, when calculating your debt ratio using our Debt Ratio tool, you need to consider the monthly payment of the desired consolidation loan, not the total monthly payments of the existing debts you wish to consolidate. To determine the monthly payment of the consolidation loan, use the Loan Calculator tool, 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!  
• Good credit history
  Your credit history is divided into two parts: the first deals with your repayment habits for each of your debtsfor the past 6 years, and the second is your credit score. The credit score takes into account 5 factors to establish your overall average. The score ranges from 300 to 900, and generally, a minimum score of 680 is required to be eligible for a loan. To learn more about this, feel free to consult our credit report section.  
• Financial capacity to repay 
  Although the debt ratio is a good indicator of your debt level and financial capacity, the financial institution will also want to ensure that your personal expenses (other than for housing and debts) leave you with enough money to repay the consolidation loan. It is therefore important to prepare a budget to verify that this is the case. Regarding this matter, our budgeting section offers several tips.  
• Stablejob and residence
  A stable job and not moving every year will also work in your favor, as financial institutions like stability and predictability. However, they are also aware that in today’s job market, individuals with interesting professional profiles are sought after and more likely to change employers. If a change in your employment is aimed at improving your situation, this factor will not be held against you. 

Start by asking your financial institution for the reasons for the refusal. Sometimes, it may be a simple error in your credit report that you can correct before submitting a new application. Regardless, it is essential to know the reasons for the refusal to determine if you can quickly address these difficulties and meet the necessary conditions. 

If the refusal is due to factors you cannot change, you may consider other forms of consolidation such as a consumer proposal. The principle remains the same: consolidating all your payments into a single monthly payment, reducing interest costs, and planning repayment over a maximum of 5 years. You will then have the advantage of being able to make a settlement offer at a discount but be aware that your credit score may be affected. 

In case of refusal of a consolidation loan or if you have any questions concerning your options, you might benefit to consult one of our personal finance advisor (licensed insolvency trustee) to explain, in complete confidentiality, the options available to you. 

Many companies offer debt consolidations but be beware if it is not a chartered bank or Desjardins. Indeed, the interest rate could be much higher than 12% to 14%, and in this case, there will be no benefits of consolidating—i.e., reducing interest costs.

If your credit profile is not as strong as it should be, either because your debt level is too high, your credit history has gaps, or your financial capacity for repayment is uncertain, you may be asked for a guarantor. A guarantor is a person who will be responsible for your loan if you are unable to repay it. This is often a parent or a very close friend who trusts you enough to help you. If this is your case, beware.

Payment defaults rarely occur due to a lack of your willingness. Most of the time, they result from unforeseen circumstances such as job loss, separation, or illness. Therefore, think twice before involving a loved one in your financial endeavors. Consider that if the financial institution, which is an expert in finance, deems it necessary to require a guarantor, it means they might have doubts about your financial capacity… This should be a red flag for you.