What Is A Consolidated Loan
A debt consolidation loan is a single loan – generally obtained from a financial institution such as a chartered bank or credit union – that allows you to repay debts to multiple (and ideally all) creditors at once. The result is only one outstanding debt; to the financial institution who issued the consolidation loan. Benefits: In addition to streamlining your debts into a single payment, a consolidation loan usually has the added benefit of a lower interest rate than you were paying your other creditors. This can add up to significant savings and makes the option especially attractive if you have several outstanding high-interest debts (e.g. credit cards, payday loans, etc.). However, it is important to be mindful that consolidation loans are often termed for between 3-5 years. Therefore, the monthly payments will normally be higher than the minimum payments on the credit cards – but you will also pay your debt off faster. Limitations: Consolidation loans are particularly suited to high-interest consumer debts such as credit cards, public utilities, personal and other unsecured loans. However, not all debts are eligible. One notable example of something you can't include is your mortgage. Your financial institution will be able to offer more information about what can and cannot be paid off with the loan that they grant you. Before meeting with a financial institution's loan officer, draw up a complete list of your outstanding debts and the total outstanding value of each. While you're not required to include all your debts as part of the consolidation loan, disclosing them will help you and your financial advisor make the best decisions for your unique circumstances. Qualifications: Unfortunately, securing a consolidation loan isn't as easy as walking into the bank and asking for one. There are several criteria your lender will consider in determining whether you qualify and the loan value they're willing to grant. Some of the factors they will evaluate include: Credit Report and Credit Score – Have you been late with your payments or have any of your debts gone into collections? Are your owing balances excessively high, especially compared to your credit limits? Income – You will generally only be allowed to borrow up to 40% of your gross annual income for adebt consolidation loan. Your lending agent will add your proposed loan to your existing debt payments (e.g. credit cards, line of credit, mortgage, etc.) to determine whether they exceed 40% of your income. They will want to see a consistent income history for at least the past two years. Security or Collateral – Financial institutions often ask for security or collateral (i.e. an asset of similar value to the loan which they can liquidate if you default) when you apply for a consolidation loan; especially if you're having difficulty managing your payments or the loan is for a large amount. They want to ensure that no matter what, they will get the money back that they have lent out. Not Debt Free (Yet): A consolidation loan may help you save on interest charges and streamline your debt repayment strategy. However, you will still have a combined debt, which represents the total of your old debts. If you are not careful – and especially if you still have access to your accounts and credit cards – there is a chance that you will be tempted to use them and go even further into debt. Remember, the plan isn't to make managing your debt easier or cheaper, it's to get out from under that weight once and for all. If you've approached several financial institutions about a consolidation loan but were rejected or quoted monthly payments that would be more than you can afford, there are other options available. During a Free Confidential Consultation, a Licensed Insolvency Trustee will review your financial situation to determine whether a Life-Changing Debt Solution may be right for you. For many people a consumer proposal is an excellent alternative to a debt consolidation loan. Like a loan, you make only one easy monthly payment. But unlike a loan, you won't pay any interest, and it is often possible to negotiate a settlement with your creditors where you pay less than the full amount owing. Call us today to learn more and discover how we can help you get on track to the financial fresh start you deserve. Based out of Stoney Creek, Augustine Kwok is a Licensed Insolvency Trustee at MNP LTD. To learn more about how MNP Debt can help, contact our local office at 1.800.324.6169or toll-free at 310.DEBT (310.3328).
