How to Solve Your Debt Problems
In Canada, there are many ways for you to try and consolidate your debt.
Every consolidation option comes with pros and cons, and not every single option is available to everyone.
If you want to make sure that you don’t end up making a bad decision with your debt, then this is the guide for you.
Need Help Reviewing Your Financial Situation?
Contact a Licensed Trustee for a Free Debt Relief Evaluation
Consolidate using a Loan
A debt consolidation loan is where a credit union or a finance company will provide you with the money you need to pay your outstanding debt.
You will then consolidate them together in a single big loan.
This gives you three main advantages, which can be found below:
- You’ll have a single monthly payment.
- You will be able to take advantage of a lower interest rate.
- Your debt will be paid off in a set period of time.
Banks and even credit unions will usually give you the best interest rate for your debt consolidation loan.
A lot of factors will help you to get a much better interest rate with a credit union, this can include having a good credit score or having a high net worth.
It can also depend on your relationship with them as well.
For the last decade or so, banks tend to charge between 7-12% on a debt consolidation loan but finance companies can charge between 14-30% for an unsecured loan.
The main disadvantage that comes with a debt consolidation loan is that you must have a good credit score.
Your bank will never usually approve an unsecured consolidation loan, but it has happened before.
If you want to qualify for a loan like this and do not want to have it be secured, then you need to have a high net worth and a strong credit score.
What are your Chances of Being Accepted?
If your credit score happens to meet the bank’s minimum requirement, and you don’t have too many negatives on your report, then you have a high chance of being accepted.
If you don’t quite meet all of the requirements for a consolidation loan, then you may be able to have a cosigner help you to meet the requirements.
If your minimum payments are too high, even after you take out a consolidation loan then this will be factored into the situation.
If you want to get the best result out of your loan then you may want to speak with a licensed insolvency trustee as they can give you all of the support you need with the process.
Consolidate using Home Equity
A home equity loan, or a second mortgage could also be an option if you want to try and consolidate your debt.
These terms essentially refer to the bank giving you money against a portion of your home.
If the bank happens to put your home’s value at $300,000 and the mortgage you have is for $250,000 then you will own $50,000 of your home.
This is known as your equity.
The bank may allow you to take out a second mortgage as this will help you to clear your debts.
If you do this then you will have two mortgages.
You will have your first mortgage and the second would be for your debt consolidation.
There’s way more to this process than meets the eye, so make sure that you talk to your bank before you decide on the best path to take.
A lot of the time, the interest rate for your second mortgage will be the same as your primary mortgage.
If you know that you need to pay a higher rate on your second mortgage, then you need to factor this into account.
Using a second mortgage to consolidate your loan may mean that you can extend the amount of time you have to pay back the loan, while also having more flexible payment arrangements.
The disadvantage is that you need to have enough equity in your home, and you also need to pay a lot of fees.
Consolidation Using a Line of Credit
Before the great recession, banks were giving out lines of credit up to $20,000 to everyone they could.
The global economy has changed a lot though, and now it is much harder to qualify for credit.
You can easily check with your bank to find out if you can uncover their criteria while also being able to give yourself the best chance of success.
If you want to consolidate using a line of credit, then you will need to have a very good credit score and you will also need to have a positive net worth.
Lines of credit can either be secured, or they can be unsecured.
This will depend on the situation you are in, and how much you can afford to pay back.
It should be noted that an overdraft and a line of credit are essentially the same thing.
Both of them will turn your bank card into a credit card so that you can spend money that you don’t have.
You will however need to make the minimum payment each month.
An overdraft is normally the most expensive line of credit you can take out.
Banks and even credit unions can charge 20% interest and you will also have monthly fees on top of this.
There are some advantages to using an overdraft to consolidate your debt, and some of them include lower interest rates and more flexibility.
What’s the Best Option?
If you want to overcome your debt then a consumer proposal is normally the best option.
If you need help with your decision then it is vital that you talk to a licensed insolvency professional, such as Bankruptcy Canada.
When you do, you can then find the best option for you while also being able to understand the various consequences that accompany each type of consolidation.
If you need help, then contact us today.
You can get in touch by phone or by email and when you do, you can then count on us to give you as much support as you need.
Information on Consumer Proposals
Consumer Proposals in Canada – An Alternative to Bankruptcy
What is a Consumer Proposal?
How to Amend a Consumer Proposal
What are the Benefits of a Consumer Proposal?
What are the Steps in a Proposal?
Consumer Proposal Eligibility
What Debts Are Erased in a Consumer Proposal?
Is There Life After a Proposal?
How to File for Bankruptcy
What is Bankruptcy?
How Does Bankruptcy Work?
What is the Cost of Bankruptcy in Canada?
How to Rebuild Credit Following Bankruptcy
Personal Bankruptcy in Canada
What Debts are Erased in Bankruptcy?