Debt Consolidation Loans Bad Credit Canada
What, Why, How, Dangers and Alternatives
by Kevin Sun
Debt consolidation loans for bad credit combine multiple debts into one with the goal of making that debt easier, faster, and cheaper to pay off. But if you’re not careful, the opposite can happen – especially for loans that market guaranteed approval but hide harmful conditions in the fine print. A lower credit score can also complicate the process of consolidating your debt as well as introduce new dangers. Learn how consolidation loans for poor credit work, why you should or shouldn’t consider one, and what alternatives you may have.
What Exactly Does It Mean to Consolidate Your Debts
and How Does This Work?
In Canada, your debt can be consolidated in 2 ways. The first method is to borrow money that you then use to pay off all your unsecured debts. If done properly, you’ll only have to worry about repaying that one new loan instead of the multiple bills you had before. However, doing this only makes financial sense if the new loan’s interest rate is lower than the interest rates of your other debts. Otherwise, you’ll end up paying more in interest for the same amount owing.
The second method is to consolidate your debt payments through something like a debt management program. Instead of making a smaller payment to each creditor you owe money to every month, you’ll make 1 larger payment to your debt manager, who will then split that payment for your creditors. Like consolidating with a loan, this makes it easier to keep track of your payments. If the debt manager is with a non-profit credit counselling organization like CCS, they can also help negotiate better repayment terms like a lower interest rate or more favourable amortization period (i.e. the time you have to repay).
Common Debts People Want to Consolidate
Common debts that Canadians want to consolidate are credit cards, high-interest loans, and even student loans. However, not all of these types of debt can or should actually be consolidated. If the debt is secured by an asset like a cash deposit or house, then the lender has no reason to accept any new conditions (because they can just take the asset). If you owe government student loan debt, consolidation would take away the advantage of using the interest as a tax credit.
How to Get a Debt Consolidation Loan
People with Bad Credit Can Qualify
Getting a debt consolidation loan for people with bad credit is hard, but not impossible. For example, you can ask someone to co-sign for you with an unsecured loan or secure your loan with home equity if you own your residence. However, these options have their own risks, and before even considering them, make sure you can commit yourself to doing these 2 things:
- Only use the debt consolidation loan to pay off the debts you’re consolidating, close all other credit accounts (including credit cards), and don’t apply for any new credit until your loan is paid off.
- Make and follow a concrete plan that outlines exactly when and how you’ll become debt-free given your income and all of your expenses. We can help you build a budget to do this for free.
If you use your consolidation loan for anything other than paying off your other debt, then that’s just adding onto your debt – it could mean doubling what you owe. If you don’t have a strong budget to guide you on the path to becoming debt-free, then it’s easy to veer off track and end up in a worse place than where you started. These points are important for everyone, but especially for those consolidating debt with bad credit. Even if it’s possible to get one consolidation loan with a low credit score, getting the next one is even harder (or impossible).
Why You Could Be Turned Down for a Debt Consolidation Loan
Lenders look for a number of things when deciding your eligibility for a debt consolidation loan. The requirements can vary depending on your financial situation, the criteria the lender has, and whether you’re trying to get a secured or unsecured loan. Here are some reasons why you might be declined:
- Poor or bad credit rating
- Not enough credit history
- Recently applied for new credit
- No collateral like home equity or other recognized assets
- Too much debt
- Not enough income
If you’ve been turned down for a debt consolidation loan and need money now, it can be tempting to consider getting temporary relief from a payday loan. However, you may have other, much better options.
Dangers of Consolidating Debts
One of the biggest dangers of consolidating your debts is not waiting to use credit again until you’ve paid off your consolidated debts. That’s why many lenders make it a condition of your loan. For instance, if you consolidate credit card debt, after the cards are paid off, they are cancelled or frozen for at least a year or two. This gives you the chance to learn to live according to a solid budget that helps you keep your costs under control. If you skip this step when consolidating debt, you might find yourself racking up your credit cards or other debt again while still trying to pay off this big loan.
These are reasons why instead of consolidating your debts, it can be better to consolidate your debt payments through a debt management program. With a DMP, there’s no chance of doubling your debt because you’re not borrowing any more money. There are fewer consequences for missing payments, and a non-profit credit counsellor will negotiate for you to bring down interest rates. Rather than going it alone with a DIY debt consolidation approach, a counsellor will guide you through every step of the process and work to help you succeed.
Online Debt Consolidation Canada
Why a Non-Profit Debt Relief Organization Is Better
Just as a debt consolidation loan isn’t the best solution for everyone who wants debt relief, a debt management program isn’t either. So what’s best for you if you have bad credit? Instead of searching online for Canadian solutions and trying to figure that out by yourself, give us a call. Our non-profit credit counsellors can help you explore all of your options so that you can make an informed decision based on your unique situation and goals. The number to call is 1-888-527-8999, or you can email us and even chat online. Whatever your best solution ends up being, we’ll be happy to help guide you to it in a free and confidential appointment.
Last Updated on December 6, 2024
Can I get a consolidation loan if I’m on aish?
To get a debt consolidation loan, the loan and your financial situation must fit within the bank or credit union’s lending parameters. Their lending rules will look at your debt level compared to your income, your credit score, and what security you can offer as collateral for the loan. A bank or credit will offer the lowest interest rate but have the most stringent lending criteria. Then there are some finance companies out there who have much more liberal lending guidelines, but they charge astronomical interest rates and fees. The problem with paying a super high interest rate is that this makes it very difficult for someone to pay the loan off. Our best suggestion would be to give us a call at 1-888-527-8999 and speak with one of our credit counsellors. They can help you over the phone for free and help you figure out what your best options are.
Hi I’m under debt review, how can you help me?
Hi, If you live in Canada, we can go over your financial situation with you, help you create a realistic budget, and then based on your budget and your goals, go over all debt consolidation and debt relief options available to you. We can then help you narrow down your best choices and help you put together a plan to get out of debt as quickly as possible in a reasonable time-frame. Feel free to give us a call at 1-888-527-8999 to speak with one of our credit counsellors. Talking with us is always free and completely confidential.