Debt Consolidation Loan | Definition And Scope

Debt Consolidation: Definition and Scope

A debt consolidation is a loan granted by a financial institution which concerns the consolidation of several loans, such as consumer loans and credit cards.

Debt Consolidation Loan | Definition And Scope
Debt Consolidation Loan | Definition And Scope

It consists in contracting only one loan instead of paying several debts. It does not concern the mortgage.

How to Get Debt Consolidation

To set up a debt consolidation file, you have to contact the lending institutions. These will examine the personal and professional situation of the subscriber (employment, unemployment, salaried or self-employed worker).

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The request is completely free, only costs for opening the file may be requested. The lending institution will also review the borrower's finances to assess risk.

He will also check if his client's credit rating is good. If the rating is bad, the loan will be more difficult to obtain. You should therefore not wait before requesting debt consolidation from your financial advisor, otherwise your credit rating will be damaged.

A refused file may be presented to another financial institution, knowing that the file becomes "on file" at each attempt.

After two or three failures, it becomes very difficult to represent a credit file. In this case, it is better to turn to other solutions.

Advantages and Disadvantages of Debt Consolidation

Having only one debt to repay is very practical: managing the budget is simpler (a single monthly payment instead of several). Sometimes debt consolidation even saves money on interest rates when they are lower than those charged by creditors.

It also makes it possible to avoid bankruptcy, and when the file is assembled in time, it makes it possible to repay one's debts for a manageable and financially bearable amount. Finally, provided you have a stable job and sufficient resources, it is quite easy to be granted a consolidation loan by lenders.

However, keep in mind that debt consolidation does not only have advantages. Some of the main disadvantages include:

  • Difficulty getting a consolidation loan.
  • The costs of opening the debt consolidation file.
  • A total amount of debt that remains unchanged, even if interest rates are lowered.
  • An increase in the total amount to be repaid, if the debt is very spread over time.

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