Debt Consolidation: 7 Options to Know

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Keeping your monthly payments organized and affordable when you’re in debt might be difficult. Paying off all of your loans, past-due obligations, and credit card amounts can feel insurmountable at times.

Consolidating your debts can help you save money and make your monthly payments easier to handle. Let’s look at the top 8 debt consolidation alternatives in Canada and how they operate.

What Is Debt Consolidation and How Does It Work?

Consolidating your debts entails taking out a loan to pay off your previous bills. While consolidating many loans into a single, the larger one may appear frightening, it is usually beneficial because it makes repayment easier.

Taking out a consolidation loan can help you save money by lowering your interest rate and allowing you to repay your debt over a longer period of time. Furthermore, having to make a single contribution toward your debt repayment makes the procedure more manageable.

Options for Debt Consolidation in Canada

Take a peek at Canada’s X most popular debt consolidation options:

1. Debt Consolidation Loan

Debt consolidation loans are available from several banks, financial businesses, and credit unions. The financial organization lends you the funds to consolidate your debts into a single, larger loan.

The Benefits and Drawbacks of Debt Consolidation Loans

Pros

• Good interest rate – you can consolidate your debt at a lower interest rate, which will save you money over time.
• Good payback period – you have the option of repaying your debt over a long period of time, usually between two and five years.
• Low fees – Generally, financial institutions charge relatively low fees for this service.

Consolidation loans have higher interest rates than other debt consolidation choices, so they may be a better deal.

Cons

• Collateral is required – Most debt consolidation loans require some form of security or collateral.
• A credit score is required – You can only apply if you have a good credit score.
• Unsecured debt has high-interest rates, and debt consolidation loans might charge you a lot of money to pay your unsecured debt.

Consolidation loans are typically offered at low-interest rates by financial organizations. This can assist you in repaying your debt by reducing the amount of money you must repay over time.

When you apply for a debt consolidation loan, the financial institution will determine your interest rate based on your credit score, net worth, previous agreements with them, and if you can provide adequate collateral (security) for the loan. Non-RRSP savings, vehicles, and other assets that can be swiftly liquidated provide good security.

Having a large net worth or a co-signer with a large net worth and a good credit score improves your chances of getting a debt consolidation loan.

In the previous decade, most Canadian financial institutions charged 7–12% interest on debt consolidation loans. Unsecured loans, on the other hand, can have interest rates as high as 30% or more.

1. Mortgage Refinance/Home Equity Loan/Second Mortgage

Different names for the same loan include home equity loans, second mortgages, and mortgage refinancing. You can borrow money against the value of your property with this form of a loan.

If your house is worth $350,000 but your mortgage is only worth $250,000, you have $100,000 in equity.

To pay off your debts, you might be able to take out a loan using the equity in your property.

2. Mortgage Refinancing/Home Equity Loan/Second Mortgage

Different names for the same sort of loan include home equity loans, second mortgages, and mortgage refinancing. This form of loan allows you to borrow money against your home’s equity.

For instance, if your property is worth $350,000 and your mortgage is worth $250,000, you have $100,000 in equity in your home.

To pay off your bills, you may be able to take out a loan against the equity in your property.

3. Overdraft/Line of Credit

Several years ago, lines of credit and overdrafts were very easy to obtain. Lines of credit are more difficult to obtain these days, but they can still be beneficial.

If you have a high net worth, a steady income, and a strong credit score, you may be eligible for a line of credit. Depending on the lending policies of the organization, lines of credit might be unsecured or secured.

4. Credit Card

You can use a credit card to combine your debts. This debt consolidation strategy is not recommended because it might significantly increase your debt if you do not make your monthly payments. You should also consider this alternative only if you qualify for a low-interest credit card.

This strategy, however, can work if you make your payments ahead of time and pay off your balance in a fair length of time.

5. Debt Management Programs

Debt management programs are agreements mediated by a non-profit credit counseling agency between you and your creditors. When you join a debt management program, you just have to pay the counseling agency once a month. After that, the agency distributes your funds to your debtors.

You must be able to join in a debt management program with the permission of your creditors. Some of them may be hesitant at first, but following a discussion with your counselor, they may agree.

6. Debt Consolidation

Debt settlement is when you and your creditors come to an arrangement to repay a portion of your debt in exchange for debt relief.

This is a fantastic approach to pay off your obligations, but it only works if you have enough money to repay a large portion of what you owe.

Our Licensed Insolvency Trustees are financial experts who can represent you in negotiations with your creditors. Please contact us right away to discuss your debt relief alternatives.

7. Consumer Proposal

Even though a consumer proposal does not consolidate debt, it can help you get out of debt and start over financially.

A consumer proposal is a legally enforceable agreement mediated by a Licensed Insolvency Trustee between you and your creditors. This legal agreement protects you from debt collectors and establishes payment plans for your unsecured obligations. A consumer proposal also safeguards some of your assets from being liquidated to pay off your debts.

A Licensed Insolvency Trustee will work with your creditors to come up with a payment plan that will persuade them to accept a partial payment for your debts. Depending on your circumstances, a consumer proposal can lower your debt by up to 75%.

Is consolidating credit cards a good idea and the best method to get out of debt?

Consolidating credit cards is almost never a wise idea. Credit card consolidation can be beneficial only if you have access to a low-interest credit card and can guarantee that you will pay off your debt in full. Credit cards should not be used to consolidate debts as a general rule.

The Bottom Line

At Lionsgate, we specialize in helping people obtain funding private mortgages for land purchases as well as for other real estate transactions. If you are looking to buy land in Canada, get a mortgage or apply for a loan, leave us a message and we will try to connect you with local realtors and sourcing for financing.

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