There are many ways of debt reduction in Canada. Each option has distinctive benefits and limitations and not every option is available to everyone. These options vary in terms of amount, interest rates, and repayment period. If you must consolidate your debts it’s, therefore, wise to shop around for a loan that fits your needs. Here is everything you need to know about all debt consolidation options.
1. Debt consolidation loans
The word ‘consolidation’ means ‘to combine’ a number of issues or things into one ‘more effective whole.’ Debt consolidation in Toronto involves a bank, finance company or credit union offering you (borrower) a single loan to pay all your debts and consolidate them (put them together) into a single debt.
Benefits
- You will be making a single monthly payment
- Saves you money because you can consolidate your debts at a lower interest rate
- All your debts (after consolidation) will be paid off within a specific period (2 to 5 years).
- Any additional fee charged is normally low
Interest rates for consolidation loans
Both banks and credit unions offer better consolidation loans interest rates. Some of the factors that influence the level of interest rates you get include your net worth, credit score, whether or not you have a previous relationship with the credit union or the bank, and whether you can provide good collateral for the loan.
Over the last ten years, most banks have been charging around 7% to 12% interest rates on debt consolidation loans. Finance companies have been charging slightly higher interest rates ranging from 14% for secured loans to more than 30% interest rates for unsecured loans.
Limitations of debt consolidation loans
- You need collateral to acquire these loans
- You must have an excellent credit score
- Interest rates are likely to be higher than home refinancing option
- If you need an unsecured loan, interest rates can be extremely high
Banks rarely approve an unsecured consolidation loan. However, if you have an excellent credit score, high net worth or a co-signer with high net worth and an excellent credit score, your application for an unsecured debt consolidation loan might be approved.
What are your chances of acquiring a debt consolidation loan?
If you have an excellent credit score, earn a good income, can provide good collateral, and your combined monthly payments are not too high, you can easily qualify for a debt consolidation loan. Even if you don’t meet these terms, you can still get a debt consolidation loan if you can get a good co-signer.
2. Use refinance mortgage/ second mortgage or home equity loan to consolidate your debts
Acquiring a ‘second mortgage,’ home equity loan, and refinancing your mortgage all point to one thing. A bank or finance companies can lend you money against the fraction of your home value you own. If your property is worth $300,000 and your mortgage is $200,000, then you own about $100,000 of your home (equity).
A lender can offer you a second loan to use a fraction of this equity to pay your debts. That means you will have two mortgages (the first loan you acquired when purchasing your home and the second is your debt consolidation loan).
Benefits
- The second mortgage for debt consolidation is usually associated with low interest rates
- You will have flexible debt repayment arrangements. You can extend your amortization to create a realistic and manageable monthly payment.
Limitations
- You need enough home equity to qualify for a second mortgage
- There are different fees associated with the process of acquiring the second mortgage
- Most banks offer small amounts for second mortgages. In fact, $10,000 might be the lowest amount you can get.
3. Use overdraft or line of credit to consolidate your debts
An overdraft or line of credit means the same thing. They turn your debit card into a credit card, and that means you can spend money you don’t own up to a certain limit. Just like a credit card, you will be required to make a specific minimum payment monthly.
Benefits
- Lines of credit offer the lowest interest rates
- Payment flexibility as you will be required to make a certain amount of payment each month
- You can pay the overdraft faster or slowly depending on your resources.
Limitations
- If you fail to make consistent monthly payments, your debt will never go away. That’s the reason most people perceive overdrafts or line of credit as a trap.
- Overdraft interest rates fluctuate depending on the Bank of Canada prime rate. That means if the prime rate increases substantially, your monthly payments might increase too.
- Both the monthly fee and overdraft’s interest rates can make this debt consolidation option more expensive.
4. Use your credit cards to consolidate your debts
In case you don’t find a bank or finance company to offer you a good debt consolidation loan, you can combine your credit card balances into a single low-interest rate card; then you can pay off this card by paying a specific amount monthly.
5. Use a debt management program to consolidate your debts
A debt management program can consolidate all your monthly credit card payments into a single monthly installment. This single payment is made to a credit selling company then they can disperse the money to specific creditors.
6. Do a debt settlement to consolidate your debts
If you’re facing a lot of challenges in repaying your debts and you happen to get a big chunk of money you can use that amount to settle your debts. Contact your creditors and offer to settle the debts for a less amount if they can accept a lump sum debt payment. If the creditors accept, you can end up settling 50% to 80% of your debts.
Other options for consolidating your debts are by filing a consumer proposal or even by borrowing money from family and friends. Remember, it’s advisable to consult with an expert in debt consolidation in Toronto to understand the most appropriate debt consolidation option for your situation.
