25 Debt Consolidation Tips From Our Experts - Bankruptcy Canada

Debt Consolidation Advice

Debt consolidation can be a most effective strategy to help you eliminate your debt burden.

Even substantial financial liabilities can be made more manageable, brought more into control by means of simply consolidating them all into one easy to manage, more affordable one.

However, before you consolidate your debts, it helps for you to educate yourself about exactly what it involves and how it can be used in the most efficient manner.

Take a look at these debt consolidation tips from our resident experts.

  1. Start by knowing exactly where you stand with respect to your debt situation. To do that you need to list out all the debts you owe, every single one so that you know the magnitude of the problem. This tells you which debts need to be tackled first (the most expensive ones) and what would be a suitable consolidation strategy. The next step is to formulate a concrete, sustainable repayment plan that you commit to follow.
  2. Tackle your credit score head on before you start your consolidation. Keep in mind that armed with a better credit score, you make yourself a more appealing risk for lenders, who may hence offer lower rates and attractive terms on your consolidation loan. If you have some small debts that you can manage to pay off, do so, but keep the credit line open to add weight to your ‘good credit risk’ image.
  3. Remember that debt consolidation is a way to bring all of your debts under one umbrella, be it credit card debt, auto loans, unpaid bills or any others. Consider all of your debts and try to group them all when you are going for consolidation.
  4. That said, it is also important for you to keep in mind that if you have small loans that carry a low interest, it might be smarter for you to simply pay them off independently rather than clubbing them with high paying ones when you consolidate. Loans that have been paid off in time make your credit score look better. That’s not a benefit you want to forgo, neither is the lower interest rate.
  5. Talk to your credit card company and ask them about any rate balance transfer programs they may have that can switch your current outstanding to a lower interest rate. Usually there is a limited period over which the lower rate applies so you need to try and pay off the loan within that window of opportunity or at least get the bulk of the debt covered within that time. While you are asking about such programs, make sure to check if any transfer fees apply and if so, ensure that those are affordable.
  6. Talk to your credit card company and ask them to give you a lower rate. If you have recently improved your credit score by paying off some small debts on time, they might be happy to do it since you now represent a better risk for them.
  7. A consolidation loan becomes cheaper and easier to get when you have a good collateral to offer. Your home or any other hard asset makes an excellent collateral.
  8. In absence of any asset that you can use as collateral, ask for a family member or friend with excellent credit standing to be your co-signor. With them vouching for you and your new loan, you may be able to get much better terms when you take your new consolidation loan. This is especially useful when you have a very poor credit score with no immediate way of improving it.
  9. Check if your bank can offer you a personal term loan. These kinds of loans typically carry rates that are lower than credit card rates. You have a fixed pay-out going out every month if you do opt for such a loan so make provisions for that.
  10. If your credit score does not look very good, then be extra careful when you are looking for new lenders for your consolidation loan. You don’t want to get into a new debt that comes with extra fees that are prohibitively high. Some lenders may also have hidden costs that can drain your finances even more drastically so read the fine print, understand the total cost and then take on any consolidation loan.
  11. There are quite a few options you can opt for if you are thinking of debt consolidation as the solution to your mounting debts. For example, a consumer proposal or debt settlement may work just as well. Research these options as well, analyse which one offers the best outcomes for you and then make your decision.
  12. Verify the credentials of whoever is offering debt consolidation. Some unscrupulous lenders may be charging you fees throughout the life of the new loan you take on. If you do not look through the fine print before you sign up for it, you could be in trouble. Also ensure that the lender has the credentials to offer you such loans.
  13. Make sure that when you consolidate you will not be paying more than the underlying asset is actually worth. This is most important when it comes to your auto loans. Sometimes it may be more affordable for you to simply go with the original loan and pay it off.
  14. Debt consolidation typically works best when you are trying to pay off the maximum amounts and eliminate debt altogether. If you are just making the minimum payments towards a debt (say, credit card), consolidation may not have significant benefits to offer.
  15. Note that debt consolidation offers the greatest benefits when you have debts that you can manage to pay off if you have better terms, that is, if they are cheaper to get through. If paying off the debt fully is beyond your capacity entirely and it is not just the added burden of interest that is troubling you, consolidation may not quite help you.
  16. One of the most efficient ways to consolidate debts is to utilize your biggest asset, your home. A home equity loan is an excellent consolidation strategy provided you can be sure of paying off the monthly payouts. If you miss a few you stand the risk of losing your home.
  17. Before you think of a home equity loan, there are factors to consider though. Make a comparative analysis between the home equity loan and a personal loan, think about the mortgage registration expense factor and also the duration of each and the overall monthly payouts you will need to make over this term to make an objective decision on which one suits you better.
  18. With a home equity loan, one advantage you have is that the interest rate may be affordable and you may still have adequate flexibility in terms of payout in the sense that you may have the option to only pay interest initially. This could be a great window of opportunity for you to cut down costs drastically and ensure you have cash being built up that can be used later to repay your debts.
  19. Learn more about the expectations that experts have for the economy in general and interest rates, in particular. If the rates are predicted to go up in near future, taking on a fixed rate debt consolidation loan cushions you from such increases and also makes it easier for you to plan for your payments since you know exactly what your outlay is going to be.
  20. Think hard before you consolidate your student’s loans alongside your other debt. You may have special programs for student loan relief that you forgo if you consolidate them. Check around for such programs that may make it possible for you to lower the impact of the student loan significantly making it possible to pay it off.
  21. If you come into or expect to come into money in bulk in the near future, from an inheritance or a sale of family property, earmark it for your loan repayment. In such a scenario, you should look for loan consolidation strategies that will let you pay extra towards your debts and bring down the debt burden.
  22. Once you have a consolidation strategy in place and all your debts are now consolidated into one, make sure you do not run up any new debts that could negate all the benefits of debt consolidation.
  23. Making large payments towards your debts ensures that the interest you pay overall over the term of the loan is lower. That could result in some massive savings for you. Any extra cash you have should go towards paying off your debts until you are debt free, to get these benefits.
  24. Once you consolidate your debts, it is time to review why you ran up such debts in the first place. Identify your weaknesses that lead to such a situation and address them so that you do not face similar issues again.
  25. Change your spending habits so that you do not fall back into another debt trap before you are even out of the first one. For example, cut up your credit cards so that you don’t run up huge bills again. Make a habit of drawing up a monthly budget and living within it no matter what. Make provision for savings in the budget and diligently save so that you never have to rely on loans to meet unexpected expenses in the future.

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