Debt consolidation consists in borrowing a single amount of money with a financial institution to pay all of your debts. This way, you end up with a single payment which greatly facilitates the management of your finances. In addition to streamlining your debts into a single payment, a consolidation loan can offer an interest rate lower than that of your creditors. This option may seem very attractive if you have unpaid debts with higher interest rates.

Did you know that you can save even more by using a loan secured by your property to consolidate your debts, i.e. by refinancing your current mortgage?

1- Admissible debts

Debt consolidation may include debts from your credit cards, line of credit and other consumer loans.

2- Eligibility

The approval of a debt consolidation loan will depend on several criteria. The financial institution will typically base the file analysis on three major criteria: credit history, net worth and income. Derogatory credit ratings will reduce your capacity to obtain a consolidation, and the financial institution could require a guarantor to strengthen the file and to secure the repayment of the consolidation loan.

3- Benefits and disadvantages

• Benefits: Debt consolidation can offer a lower global interest rate than the combined rates of all your debts. At the same time, it will also substantially reduce your interest charges. Last but not least, debt consolidation allows you to combine all your debts at the same institution and to have only one monthly payment.

• Disadvantages: Even if debt consolidation saves you money on interest, you still have a global debt, which represents the sum of your old debts. If you reuse the accounts and the credit cards that you consolidated, you run the risk of increasing your debt again.

4- Pitfall to avoid

It is not recommended to consolidate with a long term amortization. Rather, customers should opt for a 2-tier mortgage; the first one over 20-25 years (long term), and the second one over 5-7 years (short term). The financial principle that supports this recommendation is that we should not use long-term assets to repay consumer debts. To do and to remember…

• Write a list of the debts you would like to consolidate;
• Meet with your mortgage broker and inquire about the best mortgage solutions that are available to you (rates of the different institutions, loan conditions, etc.…);
• In general, when a loan is granted, the financial institution will instruct the notary to pay your creditors directly. The financial institution may also require that the consolidated accounts and credit cards be closed to ensure that they are not used again.

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