In Canada, the burden of consumer debts continues to rise steadily. Today, the struggle to keep up with credit card outstanding, high interests loans, or miscellaneous debts is real. Here comes the importance of debt consolidation.
In addition to poor financial literacy, several other factors such as inflation and increasing cost of living contribute to debt build-up. Whatever the case may be, if you or a loved one is in a dark financial hole, then give debt consolidation a chance.
A debt consolidation loan has the potential to streamline your debt so that you can minimize monthly payments and lower interest rates. However, to unlock the full potential, it is imperative to select the best lender in Canada for your debt consolidation loan. Read more to get the best rates and free consultation in Canada.
What is debt consolidation?
In layman’s terms, debt consolidation is combining multiple debts into a single monthly payment. Generally, people avail of a debt consolidation loan due to pay-off:
- Credit card outstandings
- High-interest loans
- Multiple small loans that are hard to track
- Unexpected expenses
You get a large, low-interest, extended period loan to pay off various obligations by choosing debt consolidation. Also, you have to pay only one monthly installment instead of tracking multiple monthly installments. When planned smartly, debt consolidation is a smart choice to streamline your finances.
Before choosing a lender, you should be aware of the pre-requisites of Debt consolidation.
Debt consolidation: pre-requisites
First, a public bank or a private lender ascertains your eligibility for a debt consolidation loan. Generally, your eligibility for loan qualification depends on several factors, such as:
- Good credit score
- Good cash flow/ income
- Good debt to asset ratio
- Manageable debt
As evident from above, the pre-requisites remain the same like any other loan. While the eligibility varies from one lender to another, tapping in home equity is the most popular way to consolidate debt.
How does it work?
After checking your eligibility, the lender will decide the quantum of the loan. After that, you will be given two options:
- The lender pays off all small debts on your behalf
- A lump sum amount will be provided to you to pay off all debts
Whatever the option you select, it is mandatory to close all paid-off accounts. After that, you will pay one monthly payment to the lender as agreed upon.
8 tips in choosing a lender for debt consolidation
So, if you have finally decided to give debt consolidation a try, here are some tips for shopping like a pro for a debt consolidation loan.
1. Do an in-depth assessment of your requirements
Debt consolidation can be an attractive option for many consumers. However, like other loans, you have to pay certain processing fees and interest on the borrowed capital. Before you zero in on a lender, ask the following questions to yourself:
- Is a lower interest rate the only reason to consolidate your debt, or do you want to streamline your payment schedule?
- How quickly do you want to avail of the loan?
- Do you want a secured or unsecured loan?
The needs and budgets are key factors that will affect your decision to select a lender. Meanwhile, keep monitoring your credit score and debt to asset ratio to get better rates.
2. Shop around for the best interest rates
The prime reason for debt consolidation is to get rid of high-interest loan(s) or pay off debt faster. Therefore, do not leave a single stone unturned to shop for a low-interest loan. Research the market rates and compare them with your Lender. It is a time-tested method to shop around.
3. Look for flexibility
Traditional and large public banks shy away from lending to individuals with poor credit scores and low net worth. Nevertheless, several reputed private lenders can still lend you. However, the terms and interest rates of risky loans are less favourable.
4. Do the math
It is imperative to determine if you’ll save money while consolidating your debts. Many borrowers end up paying higher while trying to consolidate their debts. They fail to look beyond lucrative interest rates and make wrong decisions.
To put it simply, additional charges and prepayment penalties for foreclosure of existing loans should not overweigh the savings from a low interest in the long run.
5. Weigh the lenders’ accessibility
Another reason to consider a debt consolidation loan is peace of mind. People want to get rid of the hassle of maintaining multiple loan accounts. So, whenever you choose a lender, look for greater accessibility and good communication. Maybe this is the reason why tech-savvy lenders remain on the priority list of Canadians.
It is easy to work with or streamline the payment process with a digital lender. Traditional banks try to avoid such facilities.
6. Assess how convenient the loan process is?
Whatever the product may be, everyone loves shopping online. The loan is not an exception anymore. Today, the internet is full of lenders that offer hassle-free, online approval. Such web-based lenders let you check your eligibility, compare rates, and even consult a financial advisor for free. It is certainly a far better option than the traditional method of lending.
7. Access the credibility of the lender
You can check the reviews, comments, and list of satisfied customers on the official website of lenders. Similarly, to check the credibility and features of a lender, look for credit monitoring, hardship programs, and customer support provided by them.
8. Weigh in the advantages and disadvantages
Last but not least, you should get to know the pros and cons of debt consolidation before selecting a lender.
- One single monthly payment
- Saving in terms of low-interest rates
- Pay off debt faster
- Complete peace of mind
- Sometimes lenders need collateral – primarily, home equity.
- Prepayment penalties for forclosure of existing loans
- It is not a permanent solution
Undoubtedly, debt consolidation is a powerful tool to manage and pay off multiple, small debts in one go. However, it is critical to create a roadmap and compare your options. Similarly, assess your needs and budgets to achieve your financial goals.
It’s vital to select a suitable lender that offers personalized rates. In the end, debt consolidation is not the final solution for your obligations, but it’s a good financial habit that reaps significant benefits in the long run.