To consolidate all your debts into one payment, you can ask your financial institution for a single loan product, provided for that purpose. This is called a debt consolidation.
Is it a good idea? First, you have to make sure the interest rate on the consolidation loan is lower than that of your actual debts. It seems obvious, but it’s important to keep it in mind!
Are you eligible for such a loan? The first criterion that a bank will consider is your debt level. If it is too high, your loan will be refused, even if you always pay your bills on time. Why? Because your financial situation is more at risk.
The second criterion taken into account is your score which is granted by Equifax and TransUnion. In a manner of speaking, it is like your financial report card.
That said, even if you have a reasonable credit report and a debt ratio that does not reach the allowed limit, financial institutions will still remain cautious when examining a consolidation request. The fact is, by paying your creditors, the financial institution assumes all risks and becomes the only loser if, by misfortune, you can no longer pay them back.
Furthermore, banks are also afraid that you will become more indebted. Because once they have been repaid, your old creditors will not hesitate to solicit your business again! Taking on new debt will only add to the monthly payments of your consolidation loan, which in turn could bring about additional financial difficulties.
Two other conditions:
So, is debt consolidation a good idea? Yes, it is an excellent solution when possible, taking these two other conditions into account:
- Make sure the financial institution’s monthly payments are within the realm of possibility for you. There is no point in consolidating your debts if you end up with as many financial problems as you did beforehand;
- Make sure that the financial institution does not require an endorser. In our experience, defaulted payments on your part almost always result in a lack of ability, and not a lack of will. Thus, by refusing to have an endorser, you don’t risk getting a friend or relative in trouble. Also, know that the simple fact of endorsing someone will harm your endorser’s borrowing capacity, as it is considered a loan in itself. Protect your loved ones by sparing them this burden.
For any questions, do not hesitate to contact us at 1 877 995-2433.
What is a debt ratio?
It is a tool used by banks to determine if you are able to repay a loan that you would like to obtain.