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How to qualify for debt consolidation

It is common for Canadians to accumulate debt throughout the years. This means that most people are receiving several bills every month. We understand that in some cases, you won’t be able to pay the minimum monthly amount. That’s why if you are looking for an easy way to clear all your debt at a low rate, you should consider debt consolidation. If you don’t know what we are talking about, don’t worry. Below we will explain to you all the basics and touch on how to qualify for debt consolidation.

The truth is that there are many reasons why you might be drowning in debt. Maybe the increased cost of living is taking all your income, or there are several loans that you haven’t been able to pay. However, the most common cause is weak financial literacy. Most people don’t know how to manage their money, especially young adults.

If this is your case and there is no way out of your pool of debts, debt consolidation might be the best alternative for you. But, before you make a decision, we want you to understand how debt consolidation works.

How Debt Consolidation Works

Debt consolidation will help you combine various bills in which you are paying high-interest rates. This means that in the end, you will have only one debt with a lower interest. That way it will be easier to pay every month.

If you are considering these options, you might be wondering, how to qualify for debt consolidation. Overall, debt consolidation is an ideal option for anyone who has an average amount of debt or for anyone who wants to unify all their bills and stop worrying about different due dates. But, you also need to meet the following conditions to qualify for debt consolidation.

  • Your total debt

As we mentioned above, you should have a reasonable amount of debt to apply for debt consolidation. This means that excluding your mortgage, your debt shouldn’t surpass 40 percent of your gross income.

  • Excellent Credit

You need to have an excellent credit score, which means you need to do everything in your power to manage your debts before applying. Your score should be good enough for you to get a 0 percent credit card.

  • Promise to manage your debts

The last condition is promising you will look after your debts, and you will prevent having multiple compromises again. Plus, you need to have a stable income to cover all the payments for the debt consolidation.

Now that we know how to qualify for debt consolidation, we will take a look at the debt consolidation loans.

What is a debt consolidation loan?

The most common way to settle multiple bills is with a debt consolidation loan. That’s why we will focus on this option. However, keep in mind that you have more options for debt consolidation. For instance, you could apply for a home equity loan. In case you want to learn more about this alternative, visit Alpine Credits.

The reason why a debt consolidation loan is popular is that you don’t need to put any collateral. In other words, this is an unsecured loan. If you get approved for the loan, you can pay any debt, including credit cards, unsecured lines of credit, retail store cards, and personal loans. Also, if you have any public utility or tax debts, you can cover them with a loan.

Debt Consolidation Loan: How it Works

To get a debt consolidation loan, first, you need to apply for a personal loan. The amount of the loan should be enough to pay for all the debts you have at the moment. After, you will need to wait for the approval. Once you have the loan, the lender will decide your interest rate, which will depend on your current credit score.

The whole amount you get should be used to pay all your debts. When you settle all your accounts, you’ll only have to pay for the loan. To help you pay for the consolidation loan, your lender will determine a fixed monthly payment.

Since we have explained the basics of a debt consolidation loan. It’s time to tell you how to qualify for a debt consolidation loan.

How to qualify for a debt consolidation loan

If you are serious about clearing your debts, you might be investigating how to qualify for debt consolidation loans in Canada. In this regard, there are two factors that your lender will evaluate to determine if you are eligible.

  • Having good credit

The most important condition is having good credit. Otherwise, you will have a hard time finding a lender that will approve your loan. To have good credit, you need to be punctual with all the payments and reduce your outstanding accounts as much as you can.

In case you have a low credit score, there are two possible scenarios. First, the lender won’t even consider your loan. Second, your loan will be approved with a high-interest rate. The latter option is not always ideal since you need to have a lower interest rate to get the benefits of debt consolidation.

Keep in mind that every lender might have special requirements for this kind of loan. But, in the majority of cases, when you have a good credit score, the debt consolidation loan is an ideal possibility.

  • Debt service ratio

If you ask an expert how to qualify for a debt consolidation loan in your city, they will tell you that you need a good credit score and a specific debt service ratio. This is a percentage calculated from your gross income and the amount of debt you should cover every month. For instance, let’s say you have an entry-level income of $4000 and your debts sum up to $1,500. In this scenario, when calculated, your debt service ratio will be 37.5 percent.

Most experts will advise you to have a debt service ratio equal to or below 35 percent. In case it is higher most lenders will deny your loan.

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19.02.2021
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