Debt Consolidation: What’s The Right Way To Consolidate Debt?
A survey conducted on behalf of insolvency firm MNP last year revealed that as many as 47% of Canadians foresee issues covering basic living expenses due to debt this year.
Unless, of course, they take on more debt to see themselves through.
This snowball effect has primarily come to the fore since announcements of upcoming interest rates by the Bank of Canada.
Even before this, however, Equifax found that consumer debts rose by around 2.7% by the end of 2019.
Enter debt consolidation.
If poor money management led to debt in the first place, one monthly payment rather than three is an undoubtedly appealing prospect.
But, what exactly is the right way to consolidate debt and get your finances back on track?
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Consider your credit rating
Consolidation options will vary a great deal depending on your credit score.
For someone looking to consolidate on a fair to good rating, for instance, most loan options are open up to at least 80%.
By comparison, debt consolidation with a poor credit rating could lead to high interest rates that, ultimately, see you paying more on your overall.
It’s vital to note, after all, that consolidation doesn’t reduce debt.
Instead, the focus here is around making payments easier.
Before you accept any consolidation agreement, then you must check those interest rates.
Lenders will often charge higher amounts for high-risk loans, which, when paired with long repayment terms, often aren’t as helpful as they seem.
And, keeping that in mind throughout your search is fundamental.
Add debt to your mortgage
One of the primary consolidation options at the moment is that of adding debt to your mortgage.
This could be through complete refinancing or secured lines of credit (HELOCS).
The main benefit here is that your property acts as a buffer for your weak credit file.
You can then rely on that equity to secure better interest than you might face from your portfolio alone.
The downside, however, especially with HELOCS, is that you’re using your most valuable asset to secure this consolidation.
Banks and lenders are mostly pushing for these methods because they ensure ongoing interest payments and even mortgages that never end.
Again, it’s vital to consider those added interest rates.
This becomes especially pressing considering that Equifax also noted a 7.2% increase in mortgage rates owed, a figure that’s only set to rise.
As such, unless you’re willing to make drastic spending changes, this is often a path best left untraveled.
The case for consolidation loans
Consolidation loans are also sure to make an appearance as you consider popular options.
In general terms, Candian banks will lend you around 10% of your net worth, taking into account your assets minus debts.
This is good news in a way, as it ensures that you can’t borrow so much that you’re unable to repay.
Sadly, evidence points to the fact that loans like these can escalate debt.
As well as having the same inherent interest problems as refinancing, relying on loans here can become a messy spiral, especially if you aren’t willing to change your spending habits.
Rather than clearing debts, this could lead to a significantly growing interest and repayment term.
File for bankruptcy
On the extreme end of the scale, there is also an option to file for bankruptcy.
This is, obviously, a last resort, and it may not be best if you have assets.
However, if you’re relatively asset-free and can’t overcome escalating debts, this could be your best chance at a fresh start.
According to official statistics, as many as 125,878 Canadians take this step each year.
And, when they do, they eliminate rather than lengthen debt terms.
This option certainly isn’t for everyone but, if you feel at risk of rising interest rates from every other consolidation option, it’s certainly worth some consideration.
Bankruptcy does, of course, flatline your credit rating as it stands.
But, you could then potentially build your lending credentials faster than you would with an ongoing, sometimes impossible, consolidation plan.
Ultimately, there is no ‘right’ way to consolidate debt.
Instead, you must factor everything from your credit rating and spending habits right through to your asset portfolio.
Only then do you stand any chance at coming through consolidation with debts in order.
If you’re at all in doubt about which path to take, our experts are on-hand to help you choose a consolidation that surely suits.