How to consolidate debt?

How To Consolidate Debt

Have you accumulated a lot of debt and no longer know where to turn? Are you on the verge of bankruptcy and can no longer manage your finances? Before declaring bankruptcy, consider all of the options available to you, including debt consolidation which could be the ideal solution.

Consolidating your debts is getting a one-time loan to pay off most or all of your debts, ultimately giving you peace of mind and getting back to normal. If you choose this alternative, you will be able to pay a more affordable monthly amount to a single creditor thanks to lower interest rates. There are various types of consolidation loans that vary depending on your situation and that have different requirements depending on the lending financial institution.

What is debt consolidation?

Debt consolidation is a financial transaction that involves borrowing a new loan from a financial institution in order to pay off the majority or all of your debts and repay a single creditor. This debt relief solution covers credit card balances, lines of credit, overdrafts and consumer loans without including secured loans (auto and mortgage).

Combining your debts allows you to benefit from lower interest rates without really changing the total amount to be paid. It makes it easier to manage your payments since you have a single monthly payment to make on a given date rather than several on different days of the month. This solution guarantees better financial management that can be spread over five years.

However, consolidating your debts remains a solution of last resort and is subject to certain requirements:

  • A stable income that guarantees your ability to repay your monthly debt.
  • A good credit score without too many late payments or a history marred by credit accounts in collection.
  • A debt ratio of less than 40%
  • Collateral is usually required and unsecured loans come in smaller amounts.
  • Having assets works in your favor.

Steps of the debt consolidation process

1. Meeting with a Licensed Insolvency Trustee (LIT)

This is a key step in this process that allows you to get a professional assessment of your financial situation. A consultation with an insolvency trustee allows you to analyze the various financial solutions available to you and guide you towards the best option. With Groupe Serpone, you benefit from a free initial consultation.

2. Establishment of a new budget

Once you have established a list of your creditors, you need to calculate your debt ratio and determine the amount of the loan you have to request to repay all your debts. This is an important step to determine the new monthly payment due and to verify your eligibility for debt consolidation. Once you have the necessary information, you will be able to determine your new budget (loan payment, lifestyle, bills …) which will help you determine if you can honor the required monthly payments.

3. Choice of a financial institution

Your insolvency trustee will take care of finding a financial institution that will agree to grant you a consolidation loan. Several factors will be taken into consideration, including your credit rating and the stability of your income, to determine whether or not you are eligible for debt consolidation.

4. Payment to creditors with the consolidation loan

If the loan is granted, it will be used to pay off your creditors. You will have a single creditor and one payment to make per month.

5. Repayment of the consolidation loan

You have to reimburse the financial institution that granted you the loan according to the new terms required. You will have a new payment to make monthly with lower interest rates and over a period of up to five years. Once these steps are completed, you will finally be free of your debt.

The Benefits of Debt Consolidation

Consolidating your debts allows you to benefit from various advantages:

  • Better and simpler financial management, because you only have one amount to pay at the end of the month.
  • Lower interest rates and therefore the possibility of saving in the long term.
  • A good credit rating if you pay on time.
  • Applying for debt consolidation is free.
  • Repayment of the majority or all of your debts in 5 years.
  • The ability to use your assets to get better interest rates.

Different ways to consolidate your debts

There are various ways to consolidate your debt depending on your financial situation and the types of debt you have!

1. Debt Consolidation Through Credit Cards

This is a balance transfer, which consists of replacing your old credit cards with new cards with a lower interest rate. You can benefit from a low introductory rate for a period defined by the bank. A good credit rating and a stable income are generally required. However, once the period is over, interest rates may rise and you may fall back to square one.

2. Debt consolidation with a personal loan

This method depends on your income and your credit rating. The interest rates for an unsecured loan remain very high compared to secured loans. You must have a low debt ratio to get approved for this loan.

3. Loan secured by personal assets

When your debt ratio is very high relative to your income, you can resort to a secured debt consolidation loan. You therefore use one or more of the valuable assets that you own such as valuables, a vehicle, collectibles, jewelry or even paintings that will be offered as collateral. This type of loan can also generate high interest rates.

4. Debt consolidation using a second mortgage or refinancing

If you are a homeowner, you can consolidate your debt by opting for refinancing or a home equity line of credit. This method is more risky. There is also the option of using reverse mortgages which are available to Canadian homeowners aged 55 or older. The factors taken into consideration by this type of loan are the equity in your property, your age and the location of your residence. You can access this solution even if you have a low income and bad credit rating.

Is Debt Consolidation Right For You?

If you have a lot of debt that has become unmanageable over time, but you have a stable income and a previously well-maintained credit rating, then debt consolidation is a viable option. However, you should always keep in mind that this transaction excludes mortgages and generally requires collateral such as the equity of your house or car in order to obtain a loan.

Debt consolidation requires good discipline, because late payments are very poorly tolerated … not to mention the risk of getting into even more debt if you keep your credit cards. It is therefore important to repay the new loan on time and not take on new debt that could ruin your credit rating and hamper your financial management.

Know that you run the risk of being turned down if you have too high a debt ratio, an unstable job, a lousy payment history, or no collateral. If this is your case, you should consider other alternatives such as a consumer proposal, which is a negotiation between your licensed insolvency trustee and your creditors. This is a solution provided for by the Bankruptcy and Insolvency Act which also benefits from several advantages:

  • One monthly payment to your trustee
  • Reducing the total amount of your debts unlike debt consolidation which does not change the amount owed
  • No interest
  • Protection against the risk of seizure of wages or property
  • Protecting your job
  • A repayment that can be spread over a period of 5 years

The consumer proposal can allow you to reduce your debt by up to 70%, but it also meets certain criteria:

  • The total amount of your debt cannot exceed $ 250,000
  • The minimum debt is $ 1,000
  • You must have financial problems
  • Reside or own property in Canada

It is important to specify that the consumer proposal, unlike debt consolidation, appears in your credit report. This note will remain until the end of the proposal and even years after. In addition, if you don’t respect your payment obligations and are late on three payments, the proposal is canceled and your creditors can demand their repayment again on the terms they wish. At this point, it is important to know what to do if the consumer proposal is canceled.

Before starting any procedure, always make sure that the interest rate and payment period suit your lifestyle. Once you’ve set your budget, keep your goals in mind and stay disciplined. If these two alternatives do not match your financial situation, you can consider personal bankruptcy. This is a legal process that aims to make a debtor pay his debts by selling his assets.

We advise you to proceed step by step to make sure you make the right decision:

  • Calculate your total debt with their interest rates.
  • Develop a new budget and review your daily expenses.
  • Try to renegotiate your debts.
  • Improve Your Credit Rating
  • Check if you have any valuable assets to sell that can help you alleviate your debt
  • Use a debt consolidation
  • Make a consumer proposal
  • Apply for personal bankruptcy

To support you throughout this procedure and above all to guide you in making the right decisions and in better managing your finances, Groupe Serpone is at your disposal. Our firm of accredited bankruptcy and insolvency trustees is here to help. Our experts will help you find the best solution based on your needs and financial difficulties. We are specialists in debt consolidation, consumer proposal or personal and corporate bankruptcy. Don’t hesitate to get a free consultation!