What is Debt Consolidation Loan in Canada?
A debt consolidation loan
combines two or more debts into a single loan which is typically borrowed from a financial institution. Such institutions are the banks, credit unions
, and Caisses populaires. Finance
companies also offer debt consolidation
, but they charge higher interest rates in comparison to mainstream banks
. This type of loan allows the borrower to repay his debts to multiple creditors by means of one outstanding loan. In addition to having a single payment, the borrower enjoys lower interest rate than the one previously charged. Debt consolidation loans
are especially attractive to borrowers who pay high interest rates such as interest rates on credit cards
and retail store cards.
Debts that may be consolidated into a single payment include consumer loans
, credit card debt, student and utility loans, etc. Mortgages cannot be included in the new loan. Banking institutions
may have specific requirements on the loans that are eligible. There are certain qualification requirements such as sufficient income and good credit rating
. In other words, the borrower has to demonstrate ability to cover his monthly expenses and make regular monthly payments. A bad credit rating reduces one’s chances of securing a debt consolidation loan
. It is better to consider credit repair options first.
It is free to apply for consolidation loan, but the bank may charge a fee to open a file for the borrower.
It is best to inquire about the requirements of the institution of one’s choice.
There are several advantages of taking a debt consolidation loan. First, it is more convenient to have a single loan rather than servicing multiple debts, with interest rates being charged at different times. Second, the interest rate may be substantially lower than the one paid on a credit card
. Third, all current creditors are paid promptly and in full. This is an important step toward preserving one’s good credit record. As long as the borrower meets his monthly obligations in a timely manner, his credit record is not affected. Borrowers should keep in mind that they still owe the total amount of their combined debts. Those who have access to credit cards and other accounts may continue using them and go into more debt.
Another point to remember is that banks may be less flexible than other creditors. Therefore, they may be less willing to accept late payments. It is wise to learn about the loan’s terms and conditions before consolidating one’s debts. Finally, it may be somehow difficult to find a financial institution that offers fair interest rates. If the interest rate on the new loan is about the same as the one on the borrower’s current loans, consolidation does not make much sense. The consolidation loan may come with a lengthier repayment term, whereby one ends up paying more in interest. Debt consolidation may be an effective tool for some, while others may benefit more from using alternative options (e.g. debt settlement
plan or credit counseling). If choice has turned into a difficult dilemma, it is best to seek advice from a financial professional.