It was recently reported that Quebeckers were more indebted than ever. That the excessive use of credit led to stories of horror of families suffocated by debts or on the verge of bankruptcy. Whatever the reasons that lead to these precarious situations, know that you do not have to let the ship sink! There are several financial solutions available to help you repay your debts quickly and especially to contain the haemorrhage caused by excessive interest rates.
Although no one dares to talk about it, everyone knows that bankruptcy is one of those options, although it is certainly the least envious. The consequences are heavy and can stretch over several years. We therefore propose a comparison of the different alternatives to bankruptcy, namely the consumer proposal as well as the consolidation of debts. You will be able to recognize yourself in these different scenarios, to identify your needs and will be able to seek the help of a professional to put your action plan in motion!
What is insolvency and its consequences?
Insolvency is a very simple concept that needs to be defined before going further. It is the financial statement of a person who is no longer able to pay his debts to his creditors because the value of his liabilities (debts) exceeds that of his assets.
This means that the insolvent person is no longer able to pay his bills, such as credit cards, electricity bills, mortgage payments, and pay all the charges that he has made to his creditors.
The causes of insolvency are many and may include:
-The overuse of credit
-Inadequate financial management
-The job loss
The most obvious consequence of insolvency is the inability to pay back creditors, but it is also one of the essential conditions for declaring bankruptcy or issuing a consumer proposal.
If that’s your case, read on and learn more about these two over-indebtedness remedies.
Debt consolidation, is it an option for you?
Are you in a state of panic before the countless creditors who knock on your door demanding to be reimbursed their due by imposing their excessive interest rate at the first opportunity? If you recognize yourself in such a scenario, debt consolidation might be a beneficial option for you.
Debt consolidation involves borrowing money from a financial institution to repay all debts owed to creditors. This makes it possible to have only one creditor to repay, which greatly facilitates the management of a portfolio already in distress.
Consolidation has many advantages, such as:
– A lower interest rate : Having only the bank to pay back makes the interest rate more favorable than the one you were subject to with several creditors.
– Easy payment: By consolidating debts into one payment, the portfolio becomes easy to manage.
-The credit rating: The consolidation protects your credit side, because the payment plan put in place by the bank will be established so that you are able to pay the monthly payment. This will prevent you from paying your credit cards late, which will negatively affect your rating.
Are you eligible for the consolidation loan?
As in many other situations, the bank has the last word on the granting of the consolidation loan. In this regard, many criteria are taken into consideration by financial institutions to decide whether you are eligible for the loan. Here are a few :
-Payment history: Were you able to make your payments on time in the past? Have you accumulated months late on certain credit cards? These are some of the factors that banks take into account when looking at your payment history.
-The credit report: We agree that if you are considering debt consolidation, your credit rating may not be as good as you would like. Each bank has its own standards, but the quality of your general credit file will dictate your eligibility for the loan, and in the event of your admission, the interest rate that will be attached to it.
-The salary: Whether the loan you want is guaranteed or not, the bank will inevitably look at your annual income to establish your ability to repay. The salary is all the more important if you hope to contract an unsecured loan, because the bank will have no property assigned to your obligation to ensure the payment of their debt.
-The amount of the debt: The amount of the debt may make you ineligible for the loan, but the size of this amount is also associated with your ability to repay, which it results from the amount of goods you have to provide as collateral and the annual income you receive. This means that the more assets you have, the more likely you are to receive the loan needed to consolidate your debts.
Keep in mind, however, that these criteria are not exhaustive and that anyone requesting debt consolidation has defaulted on one of the above obligations at some point in their life. This is a way for the bank to measure your ability to repay the loan.
As a result, your credit rating must maintain a certain standard in order to qualify for the loan! That’s why it’s better to meet a financial planner who can analyze your file and tell you if your rating is high enough to receive a consolidation loan.
Secured and unsecured loans, will you have to provide a security?
In many cases, yes! Depending on the precariousness of your financial situation, the bank may require you to provide one or more assets as collateral to secure the payment of their claim. For example, the equity of a house can be given as collateral during a debt consolidation.
If you do not own a home, you can provide another property as collateral, such as a motor vehicle, a boat, a recreational vehicle or other valuable property that the bank will accept as collateral.
If you have no property to give as collateral, you will receive an unsecured loan. This entails more risk for the bank, so conditions may be less advantageous.
In addition, when you benefit from a secured loan, it is important to make the payments on time and fully because collateral can be seized in the event of non-payment.
The disadvantages of debt consolidation
Debt consolidation does not just come with benefits. The flip side of debt consolidation is in the loan itself. Among other things, you will most likely need to provide a warranty, as previously mentioned.
Contrary to the proposal to the consumer, you will have to pay the entire debt due to creditors, which represents a financial disadvantage of size depending on the severity of your situation.
In any case, it is important to shop your loan well, because they are not all equally advantageous. In fact, consult a professional who will make sure that you have the necessary funds to pay the entire loan, that the repayment period is reasonable and that the interest rate corresponds to market standards for situations similar to yours.
At the very least, debt consolidation is an effective way to avoid bankruptcy and an alternative to the consumer proposal.