A debt consolidation consists of a loan obtained from a financial institution which allows the reimbursement of debts. The objective is to reduce the overall interest rate, as well as to reduce the monthly payment to only one. It is an excellent way to solve one’s financial problems and to maintain one’s credit rate and score. Unfortunately, it is not available to everyone.

PRELIMINARY STEP
Before considering debt consolidation, one most determine, taking in account the levels of income and indebtedness, as well as the conditions imposed by the financial institution, whether it will be possible to reimburse the debt consolidation loan within a reasonable amount of time. If the burden of the debt consolidation loan is too difficult to support, either because the payments are too high or because of an irregular income, the objective will not be reached and the investment of time and effort will only postpone the inevitable. 

OBSTACLES IN THE WAY OF A PLAN
Beyond these considerations, one of the first obstacles that the majority of individuals run into when they consider this possibility, is that it is unfortunately too late! Often, a few months can go by before a person realizes that he or she is unable to make the monthly payments. During this time, collection agencies may have been mandated to recover the amounts owing and in some instances, legal proceedings may have already been initiated. These measures are communicated to the credit bureaus, the credit ratings and score are downgraded and the ability of obtaining a loan is greatly reduced. (see “Credit rating” and “Debt service ratio calculator”).

Regularly, financial institutions, such as banks and credit unions, will refuse a loan application under such conditions; however, should they accept, they will certainly insist on a co-signer for the loan. If this is the case, great caution is in order before asking a family member or friend to guarantee your loan. Remember that in our experience, loans in default rarely occur because one does not want to pay but, most often, because they cannot pay. Therefore, your goodwill is not sufficient to assure that your guarantor will not, one day, be held responsible for your debt. Also, the guarantor’s credit capability will be affected by the amount guaranteed on your behalf. You should therefore consider all implications carefully ?
Although, finance companies are often less demanding as regards to guarantees to be provided, the interest rates charged will be that much higher and could vary between 25 % and 45 %, which increases the amount to be paid. This alternative is generally not recommended since the objective of a debt consolidation loan is to reduce the interest rate, not to raise it.