10 myths about debt consolidation debunked for you

When it’s time to talk about finance, we hear some green and not ripe, it’s the least we can say! From grandma’s remedies to straighten your wallet to charlatan tips, the myths of the finance world are perpetuated beyond comprehension! It is certain that in a society as indebted as ours, we must be careful to choose the people from whom we accept advice and solutions, because it is the wallet that will eventually suffer, and you at the same time.

Debt consolidation does not escape! Indeed, this mechanism of financial recovery is the target of many falsehoods and that is why we demystify, for you, the 10 most common myths about the consolidation of debts. You will see that it has nothing of the incredible stories that we tried to make you swallow, be assured! You may even see an opportunity to put your stuff back in order!

First of all, what is debt consolidation?

First of all, what is debt consolidation?

Before demystifying the enigmatic debt consolidation, an explanation is needed for those who are not familiar with its operation. First, it is a loan from a financial institution for the purpose of paying all of your debts to your creditors. The bank will pay the creditors for you, and in this way you will only have one person to repay, the bank.

This option has the undeniable advantage of simplifying portfolio management and avoiding paying many late bills, which, of course, is not optimal for maintaining a good credit rating. In addition, debt consolidation can also benefit from an interest rate that is generally lower than that imposed by creditors to whom you owe money. It also allows you to spread payments over several months so that you can pay the monthly payment without any problem, taking into account your financial situation.

In addition, it is important to make an inventory of your debts, because they are not all similar, and some are more pressing to repay than others. A consolidation does not have to relate to all of your debts. For example, it may be worthwhile to apply for a consolidation loan to pay off those famous credit cards filled to the brim with accumulating interest in not knowing what to do with them. In return, debts such as a real estate mortgage are not very urgent to repay because of the almost certain value of the property to which they are attached. By doing this inventory, you will identify the debts you need to settle first to then know the size of the loan you need. It will only remain to be approved by the bank.

Now that we’ve laid out the basics and some facts about debt consolidation, let’s tackle the biggest myths surrounding this method of repayment!

  1. The negative impact on the credit rating

Let’s start with a myth that certainly worries more than one: the impact on the credit rating. As soon as we talk about debt, we are afraid of seeing our credit rating plummet, but know that consolidating your debts will not adversely affect your long-term credit rating, on the contrary!

The consolidation loan has the same impact on your credit report as any other loan. The advantage is that with this loan, you’ll be able to pay your bills each month at a much lower interest rate than the credit card companies charge. No longer falling behind on your monthly payments will positively impact your long-term credit rating!

Moreover, the consolidation is especially interesting for those who have debts with high interest rates and whose long-term accumulation is detrimental to them. These include credit and other personal loans.

  1. Consolidation as a last resort

A rumor seems to be spreading that debt consolidation is akin to bankruptcy and is on an equal footing. Know that it is not so! Consolidation is not an option of last resort like bankruptcy to settle your debts, far from it! It’s actually a way to take the lead on your finances and avoid seeing the debts pile up.

There is no point in being on the run to approach your bank with a request for debt consolidation. This mechanism applies regardless of how much you owe. As previously mentioned, consolidation also has the advantage of reducing your interest rate and consolidating your payments into one payment.

In addition, debt consolidation has far less serious or untimely consequences than options such as the consumer proposal or bankruptcy.

  1. I do not have access to debt consolidation if I do not have a house

Owning a home, it has many benefits, but it is not necessary to obtain a debt consolidation loan. Banks do not require you to own a house to give you a loan. Financial institutions rely instead on factors such as your payment history, your credit history and your annual income to make their decision.

However, it is certain that owning a home or holding a mortgage can give you access to lower interest rates. Such a situation may have an impact on the amount the bank has been given for your debt consolidation, but remember that obtaining such a loan does not depend on your ownership status.

So even if you do not have a home yet, debt consolidation is still an effective option to settle your debts!

  1. There is no difference between consolidation and debt settlement

Think again, these two options differ on many levels! In the case of debt consolidation, you borrow money from the bank in order to pay your creditors their due, whereas in the case of debt settlement, you try to find a middle ground with the latter in order to reduce the amount to be repaid.

These are two completely different repayment methods. Debt settlement often requires the intervention of experts such as an insolvency lawyer or trustee to convince creditors to surrender part of their claim.

A debt consolidation, on the other hand, does not have the effect of reducing your debt. The loan obtained from the bank is used to pay the total amount due, unlike the reduction that can be negotiated in a settlement. In addition, a debt settlement leaves traces that credit companies will see, which can affect your access to credit or the conditions that will accompany your loans in the future.

 

  1. It is only accessible to people who have bad credit

In many cases, it is the opposite case! Indeed, many people think that only people buried in debt are eligible for remedies such as debt consolidation and that the band must have a bad credit rating. This is not how the system works. Although most people who use debt consolidation are in a precarious financial situation, the banks still require a certain standard of credit rating to grant the loan.

Indeed, as it is a loan to pay your debts, financial institutions want to ensure that their money will be refunded. That’s why many of them require a good credit record. Banks also consider some factors other than credit history to make their decision:

-Your annual income and the stability of your job

-Your payment history to check your ability to repay the money lent to you

-Your credit rating

The granting of the loan is obviously at the discretion of the institution and according to the precariousness of your file, it is possible that the bank seeks to protect itself by requiring an endorser to guarantee their payment. Ultimately, the chances of getting a debt consolidation loan are higher with a good credit record than with a bad one. Like not to believe everything you hear, do you?

  1. Consolidate debts is comparable to bankruptcy

This myth is far from the account! The consequences of bankruptcy are much more serious than those of debt consolidation. By declaring bankruptcy, you are released from your debts with respect to your creditors. Your seizable property will be turned over to an insolvent trustee who will liquidate it to pay your creditors.

Bankruptcy inevitably leads to the suspension of the actions taken against you by your creditors such as legal proceedings. In addition, your debts will disappear at the time of your release. The reality differs for the consolidation of debts, because the loan contracted with the bank serves precisely to repay the entirety of the debts due to the creditors.

If the effects of each differ, the consequences are not the same either! In fact, your credit rating will automatically fall to the lowest possible threshold, you will no longer have the right to have a credit card and your access to the loan will also be amputated. In addition, the bankruptcy will be posted to your credit report for a period of 6 years if it is your first and 14 years for the next.

As explained earlier, debt consolidation is not without impact on your credit report, but the consequences are not as important as in the case of bankruptcy. You keep your access to credit, your assets will not be seized and the effects of consolidation only exist for the duration of the loan.

 

  1. The interest rate is not so advantageous

One of the main benefits of consolidating your debts is to stop paying the staggering interest that comes with credit card debt. Indeed, interest on some credit cards may be around 20%, while interest on a consolidation loan is rather around 12% subject to your personal financial situation.

Also, the repayment of this loan will be done monthly for a maximum of 5 years, which makes the payments are spaced out in time to allow a greater financial freedom and ends of months less stressful.

In addition, consolidation does not affect the credit report as negatively as not paying your credit card. This adds to the advantage of the lower interest rates that come with this option. However, you must be able to make these payments each month and you must have sufficient funds to pay the fees that are added to the interest. So you see that it can be advantageous to take advantage of such a loan and that it will save you a lot of money, especially if you have large debts to settle!

  1. Banks always demand an endorser

Unfortunately, this myth is not wholly fantasy, because many banks reserve the right to require an endorser to come and guarantee the payment of the loan you have contracted. It is however possible to obtain a debt consolidation loan without endorser. In fact, it depends mainly on the quality of your credit report and the amount of debt you are seeking to repay. Among other things, the bank will require an endorser if you are perceived as an at-risk debtor and the bank deems it necessary to guarantee its payment.

Remember, however, that it is better to avoid loans requiring an endorser at all costs, because a breach on your part could put the endorser in trouble. In fact, a consolidation loan is also considered as a loan for the endorser, so if the latter is left with the burden of your debt, his personal borrowing capacity will be greatly diminished.

This is all the more important to consider since endorsers are often family members or friends who are willing to help you in your time of need. In addition, your personal bankruptcy or consumer proposal does not release the person who is guarantor for you. Indeed, in your bankruptcy, your creditors will turn to the endorser to demand the payment of your debt for you!

You also have to talk about the infamous lapse clause if you are thinking of getting a loan with an endorser. This clause allows your creditors to demand the full payment due to them from the moment you default to the payment agreement. The endorser may therefore receive a rather insistent appeal from your creditors if such a clause is invoked.

You will have noticed that, although debt consolidation is an interesting avenue to get out of trouble financially, the fact that banks often require an endorser makes it necessary to consider the implications of such a loan. before signing at the bottom of the document!

  1. Consolidation does not accelerate debt repayment

This is a myth that must be brought to light! It is undeniable that debt consolidation speeds up the debt repayment process for most people. Indeed, by getting rid of the staggering interests that accompany credit card delays, you put a tourniquet to stop the bleeding and regain control of the situation.

In addition, a term is always attached to the debt consolidation plan. A maximum of 5 years is provided for the repayment, which gives you a certainty as to the extent and duration of your obligations. In addition, even the maximum duration of this type of loan is often shorter than the time required to pay off credit card debt.

It is therefore by controlling the interest rate and providing for a monthly payment that you are able to respect that the repayment of debts is faster. How consolidation has more and more advantages!

  1. There is no alternative in case of refusal

It must be admitted that not everyone will be accepted by the bank to obtain a debt consolidation loan. Although this avenue is promising, do not believe that such a refusal inevitably leads to bankruptcy, far from it! There are several alternatives, such as the consumer proposal!

The consumer proposal is the procedure by which you submit an offer to your creditors offering to pay only a portion of your debt. This offer does not even need to be close to the original amount, you could offer to only repay 50% of the total debt. By accepting such an offer, your creditors would give up the second half of their due.

But what would motivate your creditors to accept such a ridiculous offer? The answer is very simple: the fear of a personal bankruptcy. Indeed, if you owe money to a large number of creditors and declare bankruptcy, they will enter the competition to get their debt, but not until the secured creditors (often the banks with their mortgages) and the creditors. priority creditors have not been used.

In other words, the creditors accept a reduction of payment for fear of not being paid at all. When the choice is to accept a reduced payment to avoid fighting for crumbs, the creditors may well choose the first option. If the proposal is rejected, the bankruptcy is not automatic and you can always submit another proposal by changing the terms and conditions. This type of approach is inevitable with an authorized insolvency trustee. He is responsible in particular for drafting an offer that creditors are likely to accept and he is also responsible for initiating the legal procedure to follow. It also serves as a communication bridge between you and your creditors.

Voluntary deposit is also a potential alternative as a result of a debt consolidation loan refusal. Voluntary deposit avoids having to declare bankruptcy by handing money over to the Court of Quebec so that creditors are paid in proportion to their claim.

This amount of money is actually the so-called “garnishable portion” of your salary, which is about 30% of your gross annual income. This amount must be paid until the total repayment of your debt.

Are you ready to go from myth to reality?

Now that debt consolidation has no more secrets for you and you’ve mastered the art of recognizing the truth in a sea of ‚Äč‚Äčlies, you may want to consolidate your debts to restore your financial health. of yesteryear?

As you may have noticed, consolidation is an effective financial tool that meets the needs of many people who want to improve their financial situation. Above all, it is an interesting alternative to avoid bankruptcy or simply regain control of your portfolio.