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Unemployed Debt Consolidation Loans Explained

By Debt.ca on July 15, 2021 No Comments
person handing out unemployed debt consolidation loans

Unemployment affects people all over the country, especially recently, with the COVID-19 pandemic. In May 2020, Canada’s unemployment rate rose to 13.7%, as the COVID-19 pandemic resulted in over three million lost jobs in the two previous months. Things are improving slowly, as the unemployment rate in Canada is now 7.8%.

Luckily, the federal government provided some financial support to the unemployed due to COVID-19, such as eviction freezes, the CERB, and deferred mortgages. However, not all creditors are so forgiving.

Your owed credit card balance, living expenses, and loan payments usually don’t cease, even if you lost your job. If you start to pay late, or miss payments altogether, your credit score can plummet, and your poor credit will make it difficult for you to access more financial products. Additionally, any loan products you do access will likely be subject to high-interest rates if you have poor credit.

Paying off debt while unemployed is difficult but not impossible. Let’s look at how debt consolidation might work if you’re unemployed.

What is Debt Consolidation?

Debt consolidation is a debt solution in which a lender consolidates all your debts into one single, monthly payment, at a low-interest rate. You borrow a personal loan (debt consolidation loan) to pay off your existing debts, and the lender bases the interest rate on your credit score.  You’re responsible for making timely payments within an agreed-upon period of time.

Debt consolidation loans make it easier to pay off your debts since your principal and interest amounts are lower than usual. However, debt consolidation loans leave a negative mark on your credit report for a few years.

How Does Debt Consolidation Work If You’re Unemployed?

Although debt consolidation allows you to make a relatively lower, single monthly loan payment for all of your debts, you still need to make at least that monthly payment. Failure to make your monthly payments on a debt consolidation loan results in high penalties and fees. You also risk the loan going to a third-party collector if you default on your payments.

Affordability is the most important factor in choosing a debt consolidation loan. No matter the scenario, you must be able to afford monthly payments after taking out a debt consolidation loan. Many debt consolidation lenders have experience working with people that have unique, complex financial scenarios. Poor credit and unemployment aren’t novel qualities in a borrower.

Debt consolidation loans only work while unemployed if you have a way to make your monthly payments. Here’s how you can make debt consolidation work while unemployed:

Evaluate Alternative Sources of Income

If you lose your main source of income, it’s important to consider any other income sources that can support you in making your monthly payments.  Other possible sources of income include:

  1. Employment Insurance (EI): In Canada, most employees pay into EI. When you lose your income for a qualifying reason, the federal government issues bi-weekly or monthly EI benefit payments to you. Account for these payments in your budgeting when considering a debt consolidation loan.
  2. Family and Friends: If you have any family members or friends that wouldn’t mind supporting you throughout your unemployment, you might consider that support as an alternative source of income, even if that support is short-term.
  3. Severance and Vacation Pay: If your employer lays you off, you might be entitled to cashing out your vacation time, as well as for severance pay. Vacation is usually 4% of your pay, while severance amounts depend on how long you worked for your employer.
  4. Life Insurance: If you have a life insurance policy, you might consider borrowing money from it to cover your living expenses.
  5. Other Insurance: If you opted for credit card insurance, mortgage insurance, or loan insurance, you might have financial support if you lose your job. Make sure you examine your insurance policies carefully to see if you’re eligible.

2. Be Honest with Your Lender

When applying for a debt consolidation loan, make sure you give your lender details about your financial situation. If you lost your job, tell them the circumstances. Tell them about any sources of income you might have as well. Tell them:

  • How much money you have in your bank accounts
  • The amount of time you can realistically make your payments (months)
  • The amount of income you would need to cover the payments in future

A lender might offer a lower interest rate or lower monthly payment if they’re aware of your personal circumstances.

Other Options for Unemployed to Pay Off Debt

Unfortunately, debt consolidation only works if you can access enough funds to make your monthly loan payments. This is true for all debt consolidation loans, even if you have good credit. Without enough income to support your payments, you might be better off with a different debt solution. Some other debt-relief options are:

Conclusion

In an unpredictable world, unemployment takes many people by surprise. Even people with strong credit history might face unemployment while they still have debts to pay. If you’re unemployed and considering debt-relief options, speak to a credit counsellor to learn more about unemployed debt consolidation loans and other options.

Related to: What are unemployed debt consolidation loans?

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