Debt is a growing problem among modern Canadians, crippling their finances. However, the good news is that you can do something about it. Debt consolidation is a way Canadians use to get out of debt and streamline their finances.
However, not everyone can qualify for a debt consolidation loan. Read this article to know your qualifications for a debt consolidation loan. If you are looking for the best rates on consolidation loans, visit Alpine Credits today to get the best options in Canada.
What is debt consolidation?
People with poor finance management often find themselves struggling with various debts such as auto loans, home loans, credit card dues and other personal loans. Paying numerous installments each month becomes a hassle. If you miss out on payments, your credit score can suffer the consequences. In such a financial mess, a debt consolidation loan proves to be a boon.
Debt consolidation involves taking out a loan to pay off other small, high-interest loans. This comes with numerous benefits.
Low interest rates
The ultimate aim of going for debt consolidation is to achieve a lower rate of interest. The interest you will shell out post-consolidation should be less than what you were paying before. Only then would consolidation serve its purpose.
When you have numerous payments to make every month, the possibility of missing out on payment is high. In such a case, your credit score can dwindle if you make defaults. However, if you have just one payment to make every month, managing your finances become easy.
Opportunity to improve your credit score
When you take out a consolidation loan, your credit score reduces. However, this also brings you an opportunity to improve your score in the future. If you are regular with your payments, your credit score will improve within a few months.
Qualifications for a debt consolidation
Before you can get a loan to consolidate your debts, there are certain qualifications that you need to fulfill. Although the requirements can differ from lender to lender, here are a few basic requirements:
Good Credit History
Before approving you for a debt consolidation loan, lenders would run a credit check to determine your financial habits. If you have been missing payments frequently in the past, your record would reflect a careless financial attitude. This would make you a high-risk customer for lenders. Thus, either you would not qualify for a loan or end up paying high interest.
A credit score of more than 600 or 620 makes you a good prospective borrower.
Debt Income Ratio
The debt-income ratio tells what percent of your monthly income goes towards the payment of debts. Thus, the lower the ratio, the better. For example, if your monthly income is $1,000 and you spend $400 paying off all your loan installments, your DTI is 40%.
In no case should the ratio be more than 43%. However, a debt-to-income ratio of 36% or lower is considered ideal for loan qualifications. If you have a higher DTI ratio, it indicates that your monthly income is already stressed by monthly repayments. A new loan would not improve the ratio, and the chances of default remain high.
If you have a good credit score and DTI ratio, the ball is in your court. Thus, you must use this opportunity to shop around and compare various lenders. It is not a good idea to accept the first lender you meet. Obtain quotes from various lenders and compare the term of the loan. The interest rate and repayment term would play the most crucial factor in this regard. Also, consider the processing charges imposed by various lenders. Make sure you conduct due diligence on the lender before choosing one.
The lender would have their own processes in place to determine your vintage and credibility. Submitting the following documents is a must in most cases:
- Valid Social Insurance Number
- Proof of continuing employment
- Identity proof
- Your addresses (home and correspondence)
- Bank account details
Possessing these documents is an important key in your qualification journey. Lenders can deny you a loan if they find any discrepancies in your documents. Thus, make sure you have everything in place before applying for a loan.
Home equity – an alternative
Before you head on to take a personal loan to pay off your existing debts, consider applying for a home equity loan. Simply defined, a HELOC is a revolving credit, the limit of which is based on the value of your home. If you own a real estate property in Canada, you can leverage your position to get out of debt faster.
Normally, lenders are willing to lend out as much as 80% of your free home equity. Your home’s equity is derived by reducing your existing debts from your home’s market value. You can use this money to pay off your existing debts.
One of the biggest advantages of a home equity loan is the low interest rate. Since the facility is secured by your home, lenders charge a lower interest rate than personal loans. Thus, you end up saving a sizeable chunk of money in form of interest. The equity in your home is released as and when you pay your HELOC – it works exactly like a credit card, only with a lower interest.
Thus, this is one of the most effective ways to consolidate your debts.
Should I consolidate my debts?
The answer to the question depends on multiple variables:
- If you are guilty of lousy financial habits that have led you into a debt cycle, a debt consolidation loan will prove just a temporary fix. You would find yourself slipping into old habits and accumulating fresh debt over time. This would defeat the purpose of consolidation.
- However, if you are willing to put in the effort to change your financial habits, debt consolidation is just the head start you need.
Debt consolidation is indeed a lifesaver for people who find themselves in a financial rut. However, make sure you are eligible for a loan. If you find yourself falling behind on any requirement, take time and fix those issues. For example, you can fix your credit score by paying your bills and installments on time. You can reapply once you have things sorted. Do not hesitate to talk to a professional today if you are unsure of any aspect of consolidation.