Is Fear Holding You Back from Consolidating Your Debt?
by Julie Jaggernath
It’s natural to push debt and worries about paying what you owe to the back of your mind. If you have multiple debts with high interest rates or are struggling with too much debt, then you might have considered consolidating what you owe to simplify your payments and lower your overall costs. Yet it can be tempting to put off action, especially if you’re still getting offers for more credit in the mail. You might even feel like things aren’t so bad because you’re getting by okay with just making minimum payments and covering your bills on time. Or maybe you’re waiting for a less busy time in your life, when you think you’ll have less worries and more willpower.
The truth is that there’s no better time to deal with your debt than right now. There will always be one reason or another to avoid facing the problem, but as time passes, debt will only get worse. There are few better gifts you can give yourself than peace of mind. Take action to pay down your debt and regain control of your finances.
What’s Holding You Back?
Fear holds many people back from dealing with their debt. It could be fear that they won’t qualify for a loan or get a good rate. They could also be afraid of the temptation to continue using their credit cards or of not having the discipline to pay down their debts, which would make their situation worse. Others might just need a nudge in the right direction to move forward and consolidate their debt.
From a practical perspective, ask yourself why you would want to put this off. Every month that you delay will be another month of expensive interest charges, another month worrying about when you’ll take action, another month stuck and off-track from reaching financial peace of mind. No matter what your situation is, the only way forward is to take the first step. To help you do just that, here are some tasks you can do right now to overcome the financial fears of applying for a consolidation loan:
1. Obtain a Copy of Your Credit Report
The idea of getting a loan can be intimidating. The whole process of qualifying is quite involved, and worrying about getting approved is stressful. You can demystify a lot of this, however, by getting a copy of your credit report from the 2 credit bureaus in Canada: Equifax and TransUnion.
Your credit report has a record of your active and past accounts in your name, the balances outstanding on your accounts, and your current and past payment histories. You can request a free physical copy of your report from both Equifax and TransUnion or pay to get an online copy immediately. You can also pay to get your credit score, which will range from 300 – 900 points. People with higher scores are considered more likely to repay the money they borrow, and so are more likely to get approved for a new loan.
Get Your Own Credit Report for Free
Each credit bureau calculates your credit score differently and each lender interprets those scores according to their own lending criteria. Generally speaking, a score of around 680 is considered a good credit score and a score of 750 or higher is considered excellent. Knowing that your credit report is accurate is an important step in moving forward and applying for a consolidation loan.
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2. Know What Information Your Financial Institution Will Need to Process Your Loan Request
Review your financial institution’s website or contact their customer care centre to figure out what information they need to assess your loan request. They may ask to see your most recent tax return and T4 slip or a copy or two of a recent pay slip. They will also ask for a list of the assets that you own and the outstanding debts in your name. They will already have your banking information on hand (if you apply for a loan where you do your banking) but will need your authorization to access your credit report. They will also likely want to understand what your monthly housing costs are. Getting your documentation together in advance will make the loan application process smoother.
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3. Know What Is and Isn’t a Competitive Interest Rate
Websites like ratehub.ca publish the loan interest rates offered by different financial institutions and online lenders (be sure to check Canadian sites, not American ones). The rates vary from lender to lender, but this will give you a sense of the rate you may be offered by your financial institution. You can also ask your lender of choice to provide you with the rates on their loan products; however, they won’t be able to quote you an exact rate until you have given them a complete overview of your financial situation and allowed them to access your credit report. That’s because the best and lowest interest rates are reserved for the people with the best credit ratings. The lower your overall credit rating, the greater the chance that you’ll run into trouble repaying what you borrow. A lender incorporates this into the rate they offer you.
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4. Determine Your Budget Before You Apply for a Loan
The last step before speaking with your financial institution is having a good understanding of your income and expenses (monthly, seasonal, and irregular) as well as knowing how much of a monthly or bi-weekly loan payment fits your budget. It’s a common mistake to be overly aggressive in wanting to pay off your debt quickly and have a monthly or bi-weekly payment that takes too big of a bite out of your pay cheque. This often leads to feeling forced to use your credit cards to cover off shortfalls and unforeseen emergencies, which defeats the purpose of consolidating your debt. Build a budget that works to get the most value out of the money you earn and manage your expenses effectively.
5. Applying for a Consolidation Loan
You’ve done the work and now have a more complete understanding of your credit report, your finances, and the documentation your financial institution needs from you. All that’s left is to contact them. When speaking with the lender, they may offer you additional products like loan protection insurance. This is not a mandatory product and will add cost to your loan; the best loan protection insurance is having an emergency savings fund to manage life events. They may also recommend a line of credit instead of a loan. A line of credit works the same as a credit card – it has a maximum limit, but as long as you maintain the minimum monthly payment, the account stays open. If your goal is to get out of debt, stick with a debt consolidation loan.
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If the rate offered doesn’t seem competitive with the information you’ve gathered, share your thoughts with the bank representative and let them know you were looking for a lower rate. It never hurts to ask for a lower rate, and you may be pleasantly surprised when you do. If they aren’t willing to give you a better rate, you may be better off applying for a loan elsewhere.
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Afraid of Consolidating Your Debt? We’re Here to Help
While navigating the process of consolidating your debt may be a new experience for you and make you a little uncomfortable, once you’ve set yourself up for success your uneasiness will be replaced with a sense of confidence. However, if you’re worried about going through this process alone, we’re here to help. Our credit counsellors are experts at guiding Canadians through their debt problems and towards the right solution for them. Reach out to us toll-free at 1-888-527-8999, send us an email, or chat with us anonymously online. Our appointments are free, confidential, and don’t obligate you to anything further – you’ve got nothing to lose but your debt.