Debt Consolidation Loan: Your Ultimate Guide

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There are multiple ways to consolidate debt in Canada. Each debt consolidation option has its own set of advantages and disadvantages, and not all of them are available to everyone. It all depends on the circumstances. So, in today’s guide, we will discuss the most common and easily accessible, debt consolidation loan option.

You can compare its advantages and disadvantages to see if it is appropriate for you or not. If it does not work well for you, we have one alternative at the end as well – so that you can have a backup plan already.

Let’s start with the Debt Consolidation Loan option.

Consolidate with a Debt Consolidation Loan

It is a loan from a bank, credit union, or finance firm that allows you to pay off your outstanding bills and “consolidate” (combine) them into one large loan.

Advantages of Debt Consolidation Loan

You only have one monthly payment to worry about You usually consolidate at a lower interest rate, saving you money Your debt will be paid off in a set amount of time (typically 2 – 5 years) Any fees charged for this service are usually very low Debt Consolidation Loan Interest Rates Banks and credit unions usually offer the best interest rates Debt Consolidation Loan Fees.

Your credit score, net worth, whether or not you have a relationship with them, and whether or not you can give good security (collateral) for a loan are all criteria that can help you achieve a better interest rate with a bank or credit union. A newer model vehicle, yacht, term deposit (non-RRSP), or other assets that can readily be sold or liquidated by the bank if you don’t make your loan installments is often good collateral for a debt consolidation loan.

Banks have traditionally charged interest rates on debt consolidation loans of roughly 7% to 12% throughout the past decade. Finance businesses often charge between 14% and 30% for secured loans and over 30% for unsecured loans.

Disadvantages of a Debt Consolidation Loan

• They normally require security (collateral)
• You must have a good credit score
• Interest rates for unsecured debt consolidation loans can be exorbitant

While banks seldom approve unsecured debt consolidation loans, some do get authorized from time to time To qualify for one of these, you’ll usually need a high net worth (the number of your assets after subtracting all of your debts) and a very good credit score, or a co-signer with a high net worth and a good credit score.

What are your chances of getting a Debt Consolidation Loan?

You may qualify for a debt consolidation loan if your credit score meets the bank’s minimum requirements (i.e., there aren’t too many late payments or major negatives on your credit report), you have enough income, your total monthly minimum debt payments aren’t too high, and you can provide adequate security for the loan. If you don’t quite meet all of these conditions on your own, a good co-signer may be able to help you qualify.

If your minimum monthly debt payments are too large, even after a consolidation loan is taken into account, you have bad credit. Else, you can’t provide adequate collateral for a loan, a consolidation loan is unlikely to work.

Consider some of the other choices listed below to see if something else might work. If you don’t qualify for a debt consolidation loan, however, a solution to your problem may be more complicated than you think, and your best bet may be to consult with an experienced Credit Counsellor as soon as possible to find the best answer before it’s too late.

It is absolutely free to speak with a non-profit Credit Counselor, and the majority of them have extensive experience in the credit sector. They should be able to assist you in determining the best answer, no matter how intricate your circumstance is.

Alternative to Consolidation with Debt Consolidation Loan

What if you do not want to take the loan for any possible reason? is there a second way for you to consolidate your debt? The answer is YES! If a debt consolidation loan is not for you, you can consolidate it using a Home Equity Loan, Refinance Mortgage, or Second Mortgage.

Consolidate using a Home Equity Loan / Refinance Mortgage / Second Mortgage

A “Home Equity Loan,” “Mortgage Refinancing,” and obtaining a “Second Mortgage” are all terms that refer to the same thing. These terms allude to a bank loan you money secured by a piece of your home. So, if the bank believes your house is worth $300,000 and your mortgage is for $250,000, you own $50,000 of it.

This is referred to as your “equity.” The bank may allow you to take out a second mortgage to pay off some of your debts with some of this equity. You’d then have two mortgages: one for your primary residence and another for a debt consolidation loan. There’s a lot more to this process than what we’ve covered thus far. So, get in touch with your bank or credit union.

Advantages of Consolidating Debt with a Second Mortgage

• Typically low-interest rates
• Flexible payment arrangements.

Disadvantages of a Second Mortgage

• You must have enough equity in your home
• It can extend your amortization (the time it takes to repay the loan) to create an ideal monthly payment.
• You may be charged a number of fees for the costs involved in setting up a second mortgage

Banks often don’t like to do small second mortgages It’s possible that $10,000 is the bare minimum they’ll consider.

You May Also Like: Buy A House With No Down Payment Canada

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.

If you found this article helpful, please share it with someone you care about. Also, visit our blog to read similar articles on mortgages.