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A debt consolidation loan is a debt instrument to consolidate multiple debts into one. The interest rate and interest payments are usually lower compared to other types of loans. Moreover, the borrower makes only one monthly payment which makes household budgeting an easy task.

There are many advantages to unsecured debt consolidation loans, but obtaining such a loan is easy only if you meet the requirements of the crediting institution. The monthly income should be over a specified amount, proving to the creditor that the loan will be paid off. To that purpose, the applicant for a debt consolidation loan should be working, prove another source of income, or both. The bank or credit union assesses the borrower’s ability to service the new loan based on his financial situation. You should bring your tax returns along with recent pay stubs. The applicant’s financial situation may require that a cosigner guarantees the loan. He/ she will be responsible for the repayment of the loan if the original borrower is unable to service it. In some cases, the borrower should provide collateral such as a car, house, or another valuable item.

In Canada, bad credit debt consolidation loan are offered for different types of loans – personal loans, credit card debt, and others. Unsecured loans are usually consolidated rather than secured debt such as mortgages. The debt consolidation loan may be offered with a fixed or variable interest rate. The interest rate will be lower, but the loan is to be repaid over a longer period of time. A larger amount may have to be repaid in the long run. Moreover, if he/ she continues using multiple credit cards, the risk of incurring more debt is high. In this case, the crediting institution will not be as sympathetic to late and missed payments.

Crediworthy borrowers are usually offered debt consolidation loans because they are considered regular payers. Homeowners are considered more stable compared to borrowers who rent. Even if the homeowner defaults on the loan, the bank can always foreclose on the home. The crediting institution has the right to sell the house and then pay off the loan from the proceeds. Without collateral, borrowers can consolidate some of their loans, but the consolidated amount will be minimal. Those who have $40,000 of equity in their home will not have a problem to consolidate $25,000 of debt.

Some banks will also prefer that the applicant has a certain debt to income ratio. The borrower’s monthly disposable income should be between ten and fifteen percent of his gross income.

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