How Do I Find the Right Debt Consolidation Option for My Debt Situation?
There are several different ways to consolidate debt in Canada.
Fortunately, only Bankruptcy Canada’s licensed insolvency trustees are licensed to provide all debt solutions in Canada.
As there are a few different ways to deal with debt problems in Canada each has its own pros and cons.
Certain individuals will not be eligible for every available debt consolidation solution.
Everything will depend on your personal situation.
For your convenience we have decided to explore each solution in further detail so you can learn more about these options to have a better idea of what option could be right for you.
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If all this information is too overwhelming, you can simply contact a licensed insolvency trustee near you to discuss all your options with a professional.
Overview of the Debt Consolidation Options Available
- Consolidate Debt with a Debt Consolidation Loan.
- Using a Home Equity Loan / Refinance Mortgage / Second Mortgage to Consolidate Debt.
- Line of Credit or Overdraft Debt Consolidation.
- Use Your Credit Cards for Debt Consolidation.
- Debt Management Program.
- Debt Settlement Consolidation.
- Consolidate by Borrowing from Family or Friends.
- Filing a Consumer Proposal (Debt Proposal) to Creditors.
Qualify for a Debt Consolidation Loan
A debt consolidation loan is simply a large loan that you get from a credit union, bank, or other finance company that you use to consolidate all your smaller debts into 1 large debt repayment.
To consolidate your debts means to bring them together into 1 loan.
This comes with several advantages.
What are the Advantages of a Debt Consolidation Loan?
- There is only one loan payment to make each month. This helps you prevent missed payments and helps you focus on debt repayment.
- Debt consolidation loans often have a lower interest rate than other loans.
- Debt consolidation loans allow you to take control of your debt.
What are the Interest Rates for a Debt Consolidation Loan?
Lending institutions such as your bank often offer extremely competitive interest rates for debt consolidation loans. The interest rate charged is certainly lower than high interest debt such as payday loans or credit card debt.
If you wish to get the best interest rate you must have a decent credit score, have some net worth and have an existing relationship with your financial institution.
Having the ability to offer collateral for the loan can help as well.
Collateral is security you can put up for the debt consolidation loan such as your car, home, or another asset that can be liquidated if you fail to make the payments on the consolidation loan.
A typical interest rate you should look for in a debt consolidation loan is 7 to 12%.
Remember, the interest rate must be significantly lower than the interest rates on the debts you are trying to consolidate.
What are the Disadvantages of a Debt Consolidation Loan?
Not everyone can qualify for a debt consolidation loan and there are certainly some drawbacks to using a debt consolidation loan.
The disadvantages of debt consolidation loans include:
- You must have a good credit score to qualify for a consolidation loan.
- Interest rates are higher than other debt consolidation solutions.
- You are usually required to provide security (if you do not provide security, the interest rates are usually so high as not to be worth it).
- You do not receive any financial counselling so the chances of getting further into debt are high.
Will I Qualify for a Debt Consolidation Loan?
To qualify for a debt consolidation loan, you must have a minimum credit score, have a solid income, have low debt payments, and have assets that you can offer as security.
People with high monthly debt payments or bad credit often will not qualify for a debt consolidation loan.
To qualify for a debt consolidation loan with favourable interest rates you must offer a reasonable level of security.
Many people do not meet all these qualifications.
However, you may still be able to get a debt consolidation loan if you have a good co-signer.
If you do not qualify for a debt consolidation loan and cannot get a co-signer, then you will have to seek a different way to consolidate your debt.
If you are unable to get approved for a consolidation loan, your debt situation might be more complex than you realized.
There is always a solution to your money problems no matter how complex it may seem.
You can speak with a licensed debt relief expert for free.
Our non-profit counselors are tremendously experienced and knowledgeable in the debt and credit industry.
Consolidate Debt with a Home Equity Loan / Mortgage Refinancing
Using your home equity to repay debt can be an affordable way to consolidate your debt.
You might have heard about refinancing your mortgage, getting a second mortgage, or using a home equity loan. These all refer to using your home equity to borrow money.
Home equity refers to the portion of the home’s value that you own. For example, if your home is worth $350,000 and your mortgage is $225,000, then you own $125,000 of the home (the difference between the home value and the mortgage); your equity in the home is $125,000.
If you get a home equity loan, the bank will loan you a portion of your equity as a second mortgage to pay off your debt.
You will still have your first, original mortgage, and your second mortgage, which will act as your debt consolidation loan.
While this route to debt consolidation is often affordable and easier to qualify for other types of debt consolidation loans, it is also risky.
Borrowing against your home equity to pay off debt can lead to you losing your home if you are not careful.
Only take out a second mortgage to consolidate debt if you are confident you have control over your spending.
If your debt was through a sudden, overwhelming expense, refinancing your mortgage to get out of debt could be a viable solution.
However, if you got into debt through overspending and impulse purchases, you would be wise to seek another route for consolidating debt.
A consumer proposal, for example, allows you to cut your debt by up to 80%, protects your assets and also gives you financial counseling.
If you have trouble controlling your spending, the counseling a consumer proposal gives you could be invaluable.
What are the Interest Rates for Second Mortgage Refinancing?
Often you can get the same interest rate on a second mortgage as you got on your first mortgage.
This usually makes a second mortgage the most affordable way to consolidate debt.
Mortgage rates have been declining since the early 1980s, when they reached a peak of over 20%!
With mortgage rates at historic lows, you can often get a second mortgage with an interest rate as low as 2 or 3%.
When considering if you should refinance your mortgage, make sure you can afford a much higher interest rate.
The average mortgage rate over the past several decades has been 8.95%.
If you intend to consolidate your debts with a second mortgage always ensure you figure in the risk of a higher interest rate when determining if you can afford the repayments.
What are the Advantages of Consolidating Debt with a Second Mortgage?
The advantages of using a second mortgage for debt consolidation are:
- The interest rate is very low.
- You can arrange flexible payment arrangements.
- Qualification can be simpler in some cases.
What are the Disadvantages of Using a Second Mortgage to Consolidate Debt?
The main disadvantage of using home equity to consolidate debt is that you put your house at risk.
If you do not make the payments on your second mortgage the bank could take your home from you.
For some people this is not a major concern.
However, if poor money management got you into debt, a home equity loan can be very risky.
Other disadvantages of mortgage refinancing include:
- You must have a significant amount of equity in your home.
- You must take out a large amount. Banks and other financial institutions won’t loan only $5,000 as a second mortgage.
- There are fees and expenses involved with taking out equity as a consolidation loan.
Debt Consolidation with a Line of Credit
A line of credit is a predetermined limit you can borrow on your bank card.
Just like with a credit card, you only must make a minimum payment on a line of credit.
Your line of credit can be unsecured, or you can secure it with collateral, such as your car.
Getting qualified for a line of credit can be more challenging.
Often your bank (or whichever financial institution you are seeking a line of credit from) will require you to have a high credit score, a good income, and a low debt to income ratio, especially if you wish to qualify for an unsecured line of credit.
A Line of credit is often also called overdraft, although this is a high interest rate form of a line of credit.
What are the Interest Rates for a Line of Credit?
The interest rate for a line of credit is based on the Prime interest rate.
The Bank of Canada sets the prime interest rate based on the perceived health of the economy.
Your interest rate will, therefore, fluctuate based on the Prime interest rate; as the prime rate goes down, your interest rate will get lower.
However, if the Prime interest rate rises, the interest rate for your line of credit will also go up.
You will often hear your interest rate expressed as something like Prime + 2%.
If the Prime rate is currently 1%, then the interest rate for your line of credit will be 3%; if the prime rate drops to 0.5% then the interest charged on your line of credit will be reduced to 2.5%.
As stated above, an overdraft of your bank account is a line of credit that is the most expensive.
Often the interest rates for an overdraft is as high as a credit card and should be avoided in most cases.
The interest rates on a line of credit can be as low as 1% or as high as 8 or 10%.
Unsecured lines of credit, such as an overdraft of your bank account, can have an interest rate as high as 20% or higher.
What are the Benefits of using a Line of Credit to Consolidate Debt?
- Lines of credit often have a low interest rate.
- You are only required to make a minimum monthly payment.
- There is no prepayment penalties in most cases, so if your financial situation improves you can pay off your line of credit early.
What are the Disadvantages of using a Line of Credit to Consolidate Debts?
- The interest rate is often tied to the Prime rate set by the Bank of Canada. The prime rate has remained low for many years, although it could ho up significantly at any time.
- A line of credit can become a debt trap for people that are not disciplined with their finances.
- Interest charges and fees can make consolidating debt with a line of credit cost prohibitive.
Using a Credit Card to Consolidate Debts
Using your credit card to consolidate your debts can be extremely dangerous although it could be possible.
If you are unable to qualify for a debt consolidation loan with reasonable rates you could consolidate all your credit card balances onto your lowest interest rate card.
Once you have done this, make sure you pay down the balance as fast as possible.
If you do not have a low interest credit card, check with your bank if you could qualify for one.
If you manage to qualify for your bank’s low interest credit card, it could help you save lots of money in the long run.
Take advantage of promotional rates if you can.
If you go this route though be incredibly careful.
The reason credit card companies offer special low interest promotions is because most people do not pay off the balance quickly.
You could end up with a higher balance at a higher interest rate when the promotional rate expires.
What are the Advantages of Using My Credit Cards to Consolidate Debt?
- Some people can qualify for a low interest rate credit card. In lieu of this, there are often promotional interest rates available on high interest credit cards you can take advantage of.
- You have the luxury of payment flexibility. You should pay as much as possible towards your debt consolidation balance on your credit card, but you can also make only the minimum payment some months if necessary.
- All of your credit card debts are consolidated into 1 credit card payment.
What are the Drawbacks of Consolidating my Debt with my Credit Card?
The disadvantages of using a credit card to consolidate your debt include:
- The interest rates are exceedingly high.
- Even if you qualify for a low promotional interest rate, it often only lasts for several months.
- To get the promotional interest rate you often must pay several fees.
- Without careful budgeting, you could end up deeper in debt.
Using a Debt Management Program to Consolidate Debts
A Debt Management Plan (DMP) is organized through a credit counseling organization.
The Debt Management Program consolidates all your debt and credit card payments into one monthly payment.
Under a DMP you will make a single, monthly payment to your credit counselor.
In turn, they will disperse the funds to your unsecured creditors.
To qualify for a Debt Management Program plan you must get your credit counselor to show your creditors that it would be the right solution for you.
Your creditors must agree to the terms of the DMP or you will not be able to enter into the proposed repayment plan.
A Debt Management Plan often allows you to become debt free in five years or less; the average program lasts under 3 years.
What are the Interest Rates for Debt Management Programs?
There are both non-profit and for-profit credit counseling organizations, and the one you choose to work with will determine the interest rate you get for your program.
If you work with a for-profit credit counseling agency your interest rate will be drastically reduced, often to just a few interest points.
On the other hand, non-profit credit counseling organizations often can get your creditors to reduce your interest rate to 0%.
Under a Debt Management Program, you will have to repay all of your debts in full but having no interest charges can be very advantageous.
Despite their name, non-profit credit counseling organizations will charge you a small fee to set up your debt management program.
For-profit counselors can also offer you the same service, but they will charge more for the same service.
In many cases, the for-profit credit counseling organizations do not provide the same level of service as non-profit agencies.
What are the Advantages of Consolidating with a DMP?
The main advantage of using a Debt Management Program is you can get all your debts paid off in as little as two or three years without paying any more in interest charges.
A DMP also offers:
- No interest charges in many cases, or extremely low interest charges.
- A Debt Management Program clears off your credit report in 2 years after it is completed, which allows you to begin rebuilding your credit score.
- Gain control over your financial situation and put an end to stress over money and fights about spending.
- You can often obtain budgeting and credit counseling to help you get an understanding of your spending habits and how to avoid debt problems in the future.
What are the Disadvantages of Consolidating Debts with a Debt Management Program?
While a Debt Management Program can seem very advantageous, there are a few drawbacks to be aware of:
- You must get your creditors to agree with a Credit Counselor that the program is the best solution for your situation.
- You could be charged large fees to have the program setup.
- The DMP will impact your credit score for 2 years after your program has been finished.
Where Can I Learn More About a Debt Management Program?
To get more information about a Debt Management Program and whether it could be a right fit for your money problems you can meet with one of Bankruptcy Canada’s licensed insolvency trustees in your area.
They will review your entire financial picture and give you advice on whether a debt management program, or another debt consolidation solution will work for you.
Debt Consolidation with a Debt Settlement Agreement
To successfully settle your debts, you need to work with a credit counselling organization.
A licensed insolvency trustee can also help you make a debt settlement plan.
You might have heard advertisements about debt settlement programs.
These are often unreliable, American based companies.
We recommend only working with a licensed professional, such as a Licensed Insolvency Trustee (LIT).
In fact, many of the for-profit debt settlement programs these US debt settlement companies promote are now illegal in the United States.
Regardless of the fact these US companies offer less than stellar services, you need to use a non-profit counseling organization in Canada as they understand what your creditors are looking for in a debt settlement arrangement.
What are the Interest Rates for a Debt Settlement Plan?
When you get your creditors to agree to a debt settlement program you will not pay any interest fees.
You must pay off the agreed debt by the settlement expiry date or you could be charged some interest from that date on.
Once your debt settlement has been completed your debt will be legally paid in full.
A debt settlement agreement might see a person pay 20% of their debt, or their debt in full; it all depends on the circumstances.
Make sure you get the terms of your debt settlement in writing.
What are the Advantages of using a Debt Settlement?
- You can repay only a portion of your debt.
- A debt settlement plan allows you to repair your credit in a quick manner.
What are the Disadvantages of using a Debt Settlement Agreement?
- You must have a lump sum available to offer your creditors to settle the debt settlement agreement.
- Your credit will take a hit for 6 to 7 years (depending on the province in where you live).
- The success rate is low.
Consolidate Debts by Filing a Consumer Proposal
A consumer proposal is a legal way to eliminate your unsecured debts, while paying less than you owe.
If you are unable to qualify for a debt consolidation loan and want to avoid bankruptcy, a consumer proposal could be the right solution for you.
To make a consumer proposal to your creditors, you must work with a licensed insolvency trustee.
Your licensed insolvency trustee will act as your “consumer proposal administrator” when you file a debt proposal to your creditors.
Under a consumer proposal plan you “propose” a repayment plan to your creditors to repay a portion of your debts.
It is not uncommon for a person to only repay 20 or 30% of their debts under a consumer proposal.
Once you make a consumer proposal, all interest charges stop, and your creditors are prevented from contacting you through a legal order known as a “stay of proceedings.”
This legal protection goes into place automatically and stops collection calls, wage garnishments and lawsuits – both in place and contemplated.
Your creditors must vote on whether to accept your consumer proposal.
Consumer proposals presented from a Bankruptcy Canada trustee – or consumer proposal administrator – have a 99% approval rate.
Trustees know what your creditors are looking for and will structure a proposal that is attractive to them.
What are the Advantages of using a Consumer Proposal?
- There are no interest charges.
- You usually only pay 20 or 30 cents on the dollar, although a consumer proposal can create flexible payment arrangements.
- You will be able to keep all of your assets, even those that would be lost in a bankruptcy.
- You can avoid bankruptcy.
What are the Disadvantages of using a Consumer Proposal to Settle Debts?
There are not many drawbacks to a consumer proposal.
The main problem with a consumer proposal is that you must get over 50% of your creditors to agree to it.
As the main rule when structuring a consumer proposal is your creditors must end up “better off” than if you were to go bankrupt, so there is incentive for them to accept your proposal.
So, the vast majority of consumer proposals are accepted.
The licensed insolvency trustees of Bankruptcy Canada have a 99% success rate in submitting consumer proposals to creditors.
If your creditors vote to reject your consumer proposal, you can then make changes to the proposal if you chose to do so.
Consolidate Debts by Borrowing from Family or Friends
Borrowing money from friends and family can be a great way to consolidate high interest debts.
If a family member or friend is willing to lend money to you, you should take advantage of this generous offer.
However, this can cause many problems.
If your family or friend cannot lend you the money, do not be offended.
Not everyone is in the position to lend money, even if they seem well-off.
Additionally, you could end up in the position of being unable to repay your loved one.
This can cause a lot of stress and resentment between loved ones.
For this reason, among others, you might want to think hard about asking your friends to lend you money.
You could lose your friendship.
Your friend or family member may value your friendship too much to offer you a loan.
Don’t get upset if this is the situation – they are only looking out for your friendship.
However, if you are stuck in high interest credit card debt, your loved one could be doing you a real favour.
If you decide to explore this route to get out of debt, make sure you weigh all the pros and cons.
Where Can I Get Good Debt Consolidation Advice?
While we have tried to explain all the ways you can consolidate your debt here, you might be overwhelmed or have more questions.
This is completely normal.
If you wish to get further advice on consolidation, you can speak to either your bank or a licensed debt professional.
Speaking to Your Bank About Consolidating Debts
Your bank will have an advisor you can meet with who can discuss a debt consolidation loan with you.
In some cases, you will not qualify for a debt consolidation loan, in which case you will have to speak with a licensed insolvency trustee (LIT).
However, if the bank decides that a debt consolidation loan would work for you, they will explain how it works and answer your questions.
Speaking with a Credit Counsellor will help you explore all of your debt consolidation options
Speaking with a credit counsellor such as a LIT can help you learn all of the debt consolidation options that could be available to you.
We find that many people dealing with debt feel helpless and depressed, especially if they have been turned down for a debt consolidation loan.
Even if the bank or credit union has turned you down, there is help available for everyone.
A licensed insolvency trustee is licensed by the federal government.
They are the only debt consultants that can provide a full range of debt consolidation options.
A licensed insolvency trustee can help you get control of your debt through something as simple as budgeting, or through something more aggressive like a consumer proposal.
Your trustee can help you make a plan to consolidate your debts and get them completely paid off so you can get back on track and reach your financial goals.
Please don’t hesitate to reach out to schedule a risk-free evaluation if you are seeking to consolidate your debts.