Dealing with debt can be overwhelming and you may get to the point where you’re willing to do whatever it takes to get rid of the debt stress.
Debt Consolidation Loan Advice
Before making any rash decisions, understand the best course of action for your own personal financial situation.
“One option to reduce your debt load is debt consolidation. It can be a great way to reduce your debt, maintain a good credit rating and increase your cash flow. However, this solution isn’t necessarily for everyone. Before you decide on how to attack your debt, talk to a professional for advice,” says Jeff Schwartz, Executive Director, Consolidated Credit Counseling Services of Canada.
Consolidated Credit answers common questions that consumers ask before getting a debt consolidation loan. Find out if a debt consolidation loan is a suitable option for you.
How Does Debt Consolidation Loans Work?
Answer: In a nutshell, consolidating your debt means that you combine your debts into one loan with a monthly payment. If you are carrying a lot of credit card debt, you are probably accumulating a great deal of interest. You can reduce your debt faster if you pay more than the minimum payments on multiple credit card balances.
“By combining all of these payments into one and reducing due dates, you attack the principal of the debt more aggressively and free up more cash flow in your monthly budget, which can help you to avoid turning to debt again,” says Schwartz.
Should I Get A Loan To Consolidate Debt and Close My Credit Cards?
Answer: A consolidation will allow you to keep your credit card accounts open. But that can be a bad idea. You have to be willing to set a budget and live a cash-based lifestyle. Rejecting the “buy-now, pay-later” mentality is important. If you aren’t able to live a cash-based budgeted lifestyle then debt consolidation may not be a good plan. You’ll ultimately end up carrying even more debt.
Check to see if you’ve got the room on a card with a lower interest rate. It can be effective to combine your credit card balances on to one card. Direct your efforts towards paying the debt off on your own. If it’s a question of organizing your household finances, then paying down your cards more aggressively might be a better option. A DIY debt consolidation using credit card balance transfers might help.
Are Debt Consolidation Loans a Good Idea?
Answer: Trying to dig yourself out of mounting credit card debt by juggling multiple monthly bills with high-interest rates is overwhelming. There are many ways to get your life back on track. Some workable options include transferring the debt to a low or zero-interest credit card, applying for a second mortgage or home equity loan or paying back your debt through a debt repayment consolidation plan.
If you feel your finances are in good shape, you can go for a debt consolidation program. Along with proper credit counselling to help you with your budget, and negotiate lower interest rates on your behalf.
Are debt consolidation loans worth it? Simply put, debt consolidation loans combine multiple unsecured debts like credit card balances, personal loans and sundry other bills into one single debt. Consolidating your debts into one single payment can actually help you pay off your debt at a fraction of its original cost. Yes. If you pay off the new loan with a lower interest rate the payments are more manageable making the payoff period shorter or both.
Debt consolidation makes life easier in many ways. Now you can wave goodbye to writing
individual cheques to more than one creditor every month, and doing away with errors that often
lead to additional charges like late payments.
Try To Create new money-management habits and monitor behaviour regularly.
Keep in mind that debt consolidation doesn’t mean debt elimination. On the contrary, you should think of it as a refinanced loan with an extended repayment contract. Debt consolidation certainly helps you get back on your feet and meet your financial obligations in a responsible manner. It’s important to remember that once you enrol in a debt consolidation program, you should carefully monitor your monthly habits, closely watch your finances and avoid taking on any new debt.
The rewards of debt consolidation: An improved credit score.
In the long run, paying off your debt through a consolidation loan can certainly help improve your credit ratings. You just have to make sure that do not run up new balances on the cards that you are paying off. As you pay off your debt faster, you are freeing up your cash flow and also building strong credit simultaneously.
Yes, a debt consolidation loan is a legal and effective way to get out of debt. But before you enrol in one, you need to be certain that your finances and current lifestyle are the right fit for it.
That’s why we recommend that you contact a trained credit counsellor to help you work out the best option to get out of debt.
Will I Get Approved For A Debt Consolidation Loan?
Answer: If your debt load is out of control, one strategy to get on top of it is debt consolidation. However, what if you seek a debt consolidation loan and your lender turns you down?
“A consolidation loan can be an excellent way to pay down your debt, because it increases your cash flow and lets you target more of your debt payment towards the actual debt, rather than servicing interest. This can actually help you to pay your debts down more quickly,” says Jeff Schwartz, executive director, Consolidated Credit Counseling Services of Canada.
Why Are People Declined Debt Consolidation Loans?
“The problem is when you’ve bought into this strategy and you get turned down for your loan. As you re-tool your debt repayment strategy, it is helpful to understand the reasoning behind you getting turned down to get on the right path for your financial future,” says Schwartz.
Below are the top 5 reasons people get decline for debt consolidation loans:
- Not enough income
A basic criteria to qualify for a loan is to have a certain amount of income to be able to pay your debts. This works out to be your debt-to-income ratio. Although in theory when you consolidate your debts you will reduce that debt-to-income ratio. But if you don’t have the income to support the loan payments along with the cost of living (i.e. your mortgage/rent and some other expenses), you won’t qualify for the loan.
Income fluctuations create another qualification problem for seasonal or part-time employees.
Is it possible to increase your income, perhaps by taking on a part-time job in addition to your full-time job? It is a sacrifice of your time, but the extra income could be the answer to your debt problem.
- Debt repayment problems
Another reason you might get declined for your consolidation loan is if you have a poor history of repaying your debt. You’ve got to remember that lenders use these criteria to assess the risk of lending you money.
If your past history shows that you’ve not been paying your debts on time (regardless of the reason why), it’s a bigger risk for the lender, which may result in you not qualifying for the loan.
Commit to paying debts on time, every time, to correct this problem.
- Lack of credit history
If your credit history isn’t long enough for the lender to really get a good snapshot of how you use credit, you will not get approval.
One way to correct this problem is to take out a secured credit card and make a point of taking out small purchases that you repay in full each month. This can take time, but you will establish a solid credit history for the future.
- Lack of security
In order to reduce the risk for the lender, sometimes they like to take security out against the loan. Common assets are houses, cash or sometimes cars (although cars depreciate in value, so that may not always be an option).
If you are getting an unsecured loan, not only will the interest rates be higher, you may not even qualify if the lender feels that you are a risk in other areas.
Do you have something that you can pledge as security on the loan? That may help.
- Too much debt
Unfortunately, sometimes you’ve got too much debt to have a consolidation loan. This is tied into your income. You may be better suited to seek out other solutions. Talk to a credit counsellor about alternative options to pay down debt.
Who Qualifies for Debt Consolidation Loan?
Answer: While the concept of debt consolidation sounds great, not everyone is able to use it. If you’ve got negative marks on your credit report, you may not qualify for a loan.
Sometimes a consolidation loan saves you money, but not all debts are able to be included with a debt consolidation loan. Typically, credit cards, installment loans, medical and utility bills are able to be consolidated, but secured things (like mortgages) cannot.
Ready to speak to one of our trained credit counsellors? Call us at 1-844-402-3073 and get started with our online debt analysis today.