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How Do You Qualify For Debt Consolidation?Author: Amy Nutt
Many Canadians struggle with credit card and other types of consumer debt. Some are even stuck in a cycle of opening one credit card to pay off another. In some circumstances, debt is racked up as a result of dealing with unexpected expenses such as home or auto repairs, illness, joblessness or divorce. With soaring interest rates, it is easy to become buried under consumer debt. Most Canadians that pay only the minimum on each credit card bill are knowingly or unknowingly extending the life and cost of the debt. An unmanageable amount of debt can be very frustrating - especially when you start to feel discouraged about ever paying it off. There are, however, some ways to improve your debt situation and get you closer to paying everything off. Debt consolidation is a great way to make multiple credit card and other loan payments easier and reduce your interest rates at the same time.
What Kind of Debt Consolidation is Available?
There are two main forms of debt consolidation available to consumers. The first involves qualifying for and taking out a loan for the amount necessary to pay off all your credit card or other consumer debt balances in full. After applying for and being approved for a debt consolidation loan, the newly borrowed funds go directly to pay off all your debt. In many cases, your credit accounts that were in good standing are allowed to remain open, which can help your credit score considerably by showing that you have much available credit. The benefits are the simplification of multiple credit card bills into one, manageable monthly payment. The even greater benefit of debt consolidation loans is the reduction of the interest rate you will pay. For example, if you are currently paying 13% to 23% on several accounts, and a new debt consolidation loan gives you a 9% interest rate, you will save money and pay your debts off more quickly.
The second type of debt consolidation refers to using a credit counselor, or intermediary to negotiate with your creditors on your behalf. In this scenario, you debt is not necessarily consolidated (though it can be), but your total amounts are settled with the creditors. In this case, you may satisfy a debt in full by only paying a portion of it, but you may pay for it with your credit score if the account is closed.
Who Qualifies for Debt Consolidation Loans?
In order to qualify for a debt consolidation loan in Canada, you must meet several requirements. You will have to go through an application process that will determine whether you meet these qualifications. The requirements may vary some from financial institution to financial institution, but some general qualifications remain the same across the board.
The lending institution you select will review your monthly income and expenses. They will go over your monthly budget thoroughly in order to assess whether you will be able to meet the debt consolidation loan payments.
Qualifying for a debt consolidation loan is like qualifying for any other loan - you must be able to afford the payments. You must be able to show that you have a stable job or other source of income. Generally banks will require that you submit paycheck stubs or copies of your most recent tax return, so it's a good idea to have these on hand when applying for the loan.
If you lending institution has even the remotest doubt about your creditworthiness, they will want to see some assurance that their funds will be repaid. Most commonly, assets that serve as collateral are listed or a co-signor is sought.
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