Consolidating your debts could be a good choice for you if you have many debts and paying them all on time is something you are struggling with.
It is not necessarily the right solution for everybody, and won’t eliminate your debt, but it could help to take a weight off your shoulders if it suits your situation.
Having lots of debts leave your bank account at different points during the month can be confusing and overwhelming, but consolidating your debts could take some of that worry away.
Below, we’ll talk more about consolidating your debts in Canada and what your other options may be.
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How To Consolidate Your Debts In Canada
If you’re struggling with the burden of having too many debts, you may wish to merge all your debts into one loan.
This is the simplest explanation of what it means to consolidate your debt.
This helps to simplify your finances with one monthly payment rather than having lots of them come out at different points, and can even help you to pay off high interest debts so that you only need to worry about one (potentially) lower interest payment.
The first step is to approach your bank or credit union to see if they will help you.
They may not charge a fee, which is a bonus for those worried about money.
There are other options, though, so don’t make your mind up about debt consolidation just yet.
Adding The Debt To Your Mortgage
Adding the debt to your mortgage may be an option.
If you’re going to add this debt to your mortgage you will need enough equity in your home first.
People usually opt for this solution if they can, as mortgage interest rates are lower than other loan interest rates and mortgages can be paid off over a 25 year time period.
This means you can usually arrange lower monthly repayments than you would with other types of loan.
This option may be worth looking into before deciding whether consolidating your loans is the right choice as it could be less stressful.
Borrowing Money From Family
Borrowing money from family isn’t ideal, but it may be a better choice than consolidating your loan.
There are lots of things to remember when thinking of this option: you shouldn’t borrow from a family member who may also be struggling with money, you should both hash out the terms beforehand, and you should be absolutely sure you can pay them back.
You risk ruining your relationship with somebody important to you if you can’t pay them back, so think about this carefully.
See if you can have an honest and open conversation with a family member who you believe may be able to help you out – just be prepared for them to say no.
It’s a big ask, and could potentially put them in trouble if they agree.
There are other options, too – you could start selling things you own to make money to pay off your debts, downsizing, and cutting out unnecessary payments and expensive hobbies.
You may be able to find a smaller car that is cheaper to run and a smaller place to live, for instance.
You could even cut out an expensive hobby until you have paid off the debt, or look to increase your income somehow.
There’s always a way to do it if you’re serious about paying off your debts.
You may need to make sacrifices in the short term, but you’ll be glad you did when your debts are paid.
Be honest with yourself, and if you’re unsure on the best course of action to take, seek advice.
Getting A Debt Consolidation Loan
If you’ve decided that a consolidation loan is right for you, then there are two kinds to consider: unsecured and secured.
If you’re looking to get a loan on an unsecured basis, then you will likely only be able to secure 10% of your net worth from a bank or credit union.
If your debts are too high then you may be denied for an unsecured loan.
This isn’t the end of the line for you, though.
You may be able to put down some security on your debts to turn it into a secured consolidation loan.
The security could be your car or home, for example.
If you fail to pay, then you risk having these things taken away as payment instead.
For some, this may be your only option – which is why it’s even more important to ensure you don’t fail on any payments.
What Do You Need To Be Aware Of Before Consolidating Your Debts?
Before consolidating your debts you need to make sure you can commit to paying the correct amount each month without fail.
If you don’t put together a monthly spending plan then you could end up getting further into debt and even doubling it rather than paying it off.
This is why consolidation may not be the solution for everybody – many people may need to look for debt counseling sessions to help them change their mindset surrounding money, for instance.
The Types Of Debt You Can Consolidate
You can consolidate various types of debt.
- Credit Cards;
- Store Cards;
- Gas Cards;
- Unsecured Personal Loans;
- Unsecured Lines of Credit;
- Child Support Arrears;
- Tax Debt.
You are not able to consolidate secured loans, however. This means you cannot consolidate your home loan, car loan, or anything similar.
The Benefits Of Consolidation Loans
The benefits of consolidation loans are appealing to many:
- One monthly payment – you don’t have to juggle multiple debt payments. You have one date and payment to remember, and should be able to easily budget for it;
- Lower interest rates – you may be able to get lower interest rates in the right circumstances;
- Lower monthly payments – you may be able to lower your monthly payment;
- Can be good for your credit – having your debts paid in full looks good and will help you to avoid credit damage;
- Less pressure – you won’t get calls from creditors any longer as current debts will be paid off.
The Downside Of Consolidation Loans
There are also downsides you will need to explore:
- This isn’t the right solution for all – you will need a good credit score to qualify. The better the credit, the better the rate you will be offered.
- Rates may be higher than beneficial – rates can range from 5-45%. If you are offered a rate above 10% then it may not benefit you to accept.
- Longer terms often means paying more – it depends on how much you owe, but if you try to balance your budget by lowering your payments, you may struggle.
- Owing more money could mean paying more in the long term due to interest rates. You may need to pay more over a shorter time period to pay the loan off faster and avoid paying more interest over time.
- The risk of getting in more debt – your credit cards won’t be closed. It’s up to you to do this, even once you have paid off what you owe. If you are tempted to keep the cards open and use them, then you will end up in more debt. If later on down the line you’re tempted to open another card, again, you could get into more debt. You need to know that you’re going to stand firm in paying off your debts and staying debt-free.
It may take up to 5 years to pay off – consolidating your debt is not a quick fix. You may get a term as low as 12 months, but it could even take up to 5 years depending on your situation. If you would like a fast resolution, then this is not usually the option for you.
Is Bankruptcy An Option?
If you are looking for a fast solution and feel you have more debt than you can realistically pay off, bankruptcy may be the best route to take.
This can sound intimidating and scary, but it can give you a fresh financial start in just 9 months.
You will have bad credit, but it can give you a fast exit and help you to feel in control of your finances and life again.
Get In Touch To Learn More Today
If you want to know how to consolidate your debts in Canada, or you’re just not sure which option is right for you, Bankruptcy Canada can help.
We are a team of friendly experts and have been helping people like you with their financial issues for more than 20 years.
We can help people from all walks of life in Canada, so don’t hesitate to get in touch with us!