Debt consolidation usually involves applying for a loan from one lender to pay off many debts from various lenders.
There are six basic steps to debt consolidation loan
- First, review your budget to ensure that you will be able to afford the monthly payments on the consolidation loan. You will want to be confident that a consolidation loan will help solve your debt problem and not make matters worse. For example, you should consider not going ahead with a consolidation loan if:
- you cannot afford the monthly payment;
- you are going to incur other debt to pay the consolidation loan;
- you are likely to default on the payments; or
- the cost of borrowing on the consolidation loan is more than your existing debt.
A consolidation loan will likely add stress if you are not able to afford the payments and are forced to cut back other important expenses, like healthy food; or if you are going to incur other debt to service the consolidation loan.
What should you do before you start a debt consolidation process?
Consider consulting with a Licensed Insolvency Trustee prior to taking out a consolidation loan. Personal debt consolidation can be a good option for many people, but it isn’t the only debt relief option available. A lot of people immediately jump into asking how does debt consolidation work without realizing that there are other options that may suit their needs better.
- Second, shop around for the best interest rate and loan terms and beware of high interest rates. The best way to consolidate bills is to get a new loan with a lower interest rate than you are currently paying on your existing overall debt. This will save you money in interest charges, making it easier to repay your debts.
Beware of some other costs of borrowing that may or may not be conspicuous, like lender fees, broker fees, administrative fees and other charges that, while not factored into the interest rate, are nonetheless additional costs that should be considered. Also be mindful that private mortgagees, especially those who use their own charge terms, may have aggressive fee and default terms.
Can Debt Consolidation Mortage program work for you
Debt consolidation mortgage programs can work, but you need to be aware of all of the details. Mortgage brokers may help shop around for the best mortgage rate and terms.
- Third, complete the lender’s loan application, keeping in mind that multiple credit inquiries may reduce your credit score. Therefore, you will want to be selective when making formal applications. There are many different unsecured debt consolidation loans in Canada, but too many credit inquiries can hurt your credit rating, so only make formal inquiries with lenders that you are serious about.
- Fourth, if you qualify for the desired consolidation loan, use the loan proceeds to pay off your existing debts in full. The bank may pay your debts off directly, or you may be required to do this yourself. Also, consider closing the old accounts to prevent yourself from running the balances back up again. If you do not qualify for a consolidation loan, then consult with a Licensed Insolvency Trustee.
- Fifth, make the loan payments as required, and pay off the consolidation loan as soon as possible. If you’re wondering how does debt consolidation work in Canada, it works best if you make all of your payments on time and if you pay off your debt as quickly as you can. The goal of a debt consolidation loan is to reduce the amount of money you’re spending on interest charges and you can help yourself by paying off your loan quickly.
Consider setting up pre-authorized payments directly from your bank account, as making timely payments on the loan may improve your credit score. Keep in mind that paying the loan off early may save on interest charges, however, may also result in pre-payment penalties, depending on the terms of your loan agreement.
Check all Debt Consolidation Providers first!
This is why it’s important to look at the terms of the different Debt Consolidation Canada providers and your specific loan. Rather than just knowing how to consolidate your debt, you’ll also need to know how to consolidate it effectively and this means getting the right loan for your situation. This is most often the loan that charges the lowest interest and the fewest penalties and fees.
- Sixth, once the consolidation loan is paid off, ask the lender for written confirmation to keep in you records, and also check your Equifax and TransUnion credit reports to ensure that they correctly reflect the status of the loan. Also consider closing the account or take other action to prevent credit fraud.