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Debt consolidation
Debt consolidation Debt consolidation is very simply a loan which is obtained from a financial institution bringing together all your debts. The aim is to make only one monthly payment, to reduce the interest rate and to fix an ultimate date by which the debt will be entirely repaid (maximum 5 years).
When possible, this alternative is often an excellent solution.
Considerations for a debt consolidation:
Before considering debt consolidation, the first step is to determine whether, given one's income and debt level, a consolidation loan could be repaid within a reasonable period under terms that are acceptable to a financial institution. If the burden of the debt consolidation loan is too heavy to bear, either because the payments are too high, or because your income is irregular, the goal will not be achieved and all these efforts will only delay the inevitable.
Beyond these considerations, one of the first obstacles that most people encounter when considering this possibility is that it is unfortunately too late! Indeed, it can take several months before one realizes that his/her monthly payments exceed his/her financial capacity. Meanwhile, collection agencies may be hired by creditors to recover the monies due and/or legal proceedings may be initiated. These events are usually reported to the credit bureaus, which is damaging to your credit rating (R-9) and, consequently, your ability to borrow.
Often, financial institutions such as banks and credit unions, will refuse a loan application under such conditions or, if they grant it, they may require a co-signer (i.e. someone who is responsible for your debt in case of non-payment). In this event, you should be careful before you ask a family member or friend to co-sign your loan. In our experience, defaults in payments rarely result from one's lack of good will or good faith, but are rather the result of an inability to pay. Thus, your goodwill may not be sufficient to fully protect the person responsible for your debt. In addition, your co-signer's borrowing capacity will be affected by this because your loan is also deemed to be a loan to your co-signer. Think careful before bringing someone else on board!
Finance companies are often less demanding, but their interest rates are much higher and can vary between 25% and 45%, which has the effect of increasing the amount to be repaid . This option is not generally recommended since the objective of such a loan is to reduce the interest rate you currently pay, not increase it!
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