Consolidating debt can be achieved in a handful of ways, including the following:
- Debt Consolidation Loan
- Debt Management Program (DMP)
- Balance Transfer
1. Debt Consolidation Loans
A debt consolidation loan can be used to combine multiple debts into a single loan, ideally with a lower interest rate compared to your highest-rate debt. Essentially, you’re borrowing money to pay off all your other debts, like payday loans or credit card balances.
Rather than making several payments to different creditors every month, debt consolidation allows you to make one payment. Not only does this simplify your bills, but it also saves you money since you’re paying a lower rate than your highest-rate loan.
You can consolidate your debt using several loan types, such as:
Personal Loans
A personal loan is a lump sum loan that you can use for various purposes, such as debt consolidation. It typically has fixed monthly payments and a fixed interest rate over a set term. Approval and loan terms are based on your credit score and financial profile.
When Is A Personal Loan Best For Debt Consolidation?
A personal loan is best for debt consolidation when it offers a lower interest rate than your existing debts. It’s also a good option if you want to simplify your finances and are capable of making monthly payments without incurring additional debt.
Learn more: Debt Consolidation Loans
Home Equity Loans
A home equity loan allows you to borrow against the equity in your home, using your property as collateral. It typically has a fixed interest rate and fixed monthly payments over a set term. The loan amount is based on the difference between the value of your home and the outstanding mortgage balance.
When Is A Home Equity Loan Best For Debt Consolidation?
A home equity loan is best for debt consolidation when you have significant home equity, allowing you to secure a lower rate than your existing debts. It’s ideal if you’re carrying a large amount of debt, offering a fixed rate and predictable monthly payments. This option is suitable if you’re able to make consistent loan payments.
Home Equity Line Of Credit (HELOC)
A HELOC allows you to borrow against your home’s equity on an as-needed basis, up to a certain limit, similar to a credit card. HELOCs typically come with a variable interest rate and a draw period, during which you can withdraw money and make interest-only payments. Following the draw period, you’ll enter the repayment stage, where you repay both principal and interest over a set term.
When Is A HELOC Best For Debt Consolidation?
A HELOC is best for debt consolidation if you want flexible access to funds, instead of a lump sum of money. It’s ideal if you can secure a lower interest rate than your existing debts.
| Will Consolidating My Debt Hurt My Credit? Consolidating your debt may temporarily lower your credit score because of the following: – Credit inquiry conducted by the lender – Shortened credit when you open a new account and close old accounts – That said, if it lowers your credit utilization ratio and you make payments on time, consolidating your debt can improve your credit score over time. |
| Can I Get A Debt Consolidation Loan With Bad Credit? Yes, you can get a debt consolidation loan with bad credit. However, it may come with a higher interest rate and stricter terms. Plus, lenders may require collateral or a co-signer to reduce their risk. |
How Much Can You Save Through Debt Consolidation?
As mentioned, a debt consolidation loan can save you money if you can secure a lower rate than what you’re paying on your highest-rate debt. The following example will help you get an idea of how much you can potentially save:
| Debt Type | Balance | Interest Rate | Total Interest Over 5 Years |
| Credit Card 1 | $7,500 | 22.99% | $5,183.13 |
| Credit Card 2 | $4,000 | 23.99% | $2,902.92 |
| Personal Loan | $10,000 | 13.99% | $3,957.84 |
| Total | $21,500 | $12,043.89 |
Continuing to pay your existing debt separately will cost you $12,043.89 in interest over 5 years.
In comparison, let’s see what you could potentially save in interest over the same term by consolidating your debt with a 10.99% rate:
- Loan Amount: $21,500
- Interest Rate: 10.99%
- Loan Term: 5 years
- Total Interest: $6,541.29
In this example, consolidating your debt would save you $5,502.60 in interest over a 5-year term ($12,043.89 – $6,541.29).
2. Balance Transfers
With a balance transfer, you move your current card balances from one credit card to a new one, ideally with a lower interest rate. This can save you money on interest and simplify debt management by consolidating several payments into one. Balance transfer cards typically offer an introductory rate of 0% for a set period, during which time you can pay down your debt with no interest.
| Warning: Balance transfer cards typically charge transfer fees, which can add a significant cost to the amount you owe. These fees typically range from 3% to 5% of the amount you transfer. Make sure you factor in these fees when calculating your potential savings. |
Who Is A Balance Transfer Best For?
A balance transfer is best if you:
- Have high-interest debt
- Are looking to cut down on your interest payments
- Are able to pay off the transferred balance within the promotional period
3. Debt Management Program (DMP)
A debt management program is a structured plan facilitated by a credit counsellor to help you repay your unsecured debts. It typically involves consolidating payments into one monthly payment, negotiating lower interest rates with creditors, and coming up with a more manageable repayment schedule. The goal of a DMP is to simplify debt repayment and reduce your overall debt.
A DMP can consolidate various types of unsecured debts, such as the following:
- Credit card debt
- Unsecured personal loans
- Payday loans
- Store cards
Who Is A DMP Best For?
A DMP is best if you:
- Are struggling with unsecured debt
- Need help organizing your finances
- Need help negotiating lower interest rates
- Are able to make payments towards your debts
Where Can You Find A Debt Management Program In Nova Scotia?
Several credit counselling agencies are available in Nova Scotia, including the following:
| Agency | Services Offered | |
| Consolidated Credit | -Credit counselling -Debt management -Debt consolidation -Consumer proposal -Bankruptcy | Learn More |
| Halifax Debt Freedom | -Debt consolidation -Debt relief -Credit Counselling | Learn More |
| Bromwich+Smith | -Consumer proposals -Bankruptcy -Debt relief consultation | Learn More |
| BDO Debt Solutions | -Debt counselling -Consumer proposals -Bankruptcy | Learn More |
Alternatives Debt Relief Solutions In Nova Scotia
Aside from debt consolidation, there are other programs available in Nova Scotia if your debt situation is outside of your control:
Consumer Proposal
A consumer proposal is a legally binding agreement where a Licensed Insolvency Trustee (LIT) negotiates with your creditors for you to repay a portion of your debts over a set period. It offers protection from creditors, collection calls, and wage garnishment. This option is suitable if you need structured debt relief and are able to stick to a repayment plan.
Bankruptcy
Bankruptcy is a legal process that’s facilitated by an LIT, and provides relief from actions like wage garnishment and lawsuits. This is a last resort option if you’re unable to pay off your debts. Bankruptcy can eliminate most of your obligations under court protection and provides you with a fresh financial start, though you may lose some of your assets (with certain exceptions).
Debt Settlement
Debt settlement is a process where you negotiate with your creditors to reduce the total amount of debt. This involves making payments for less than the full balance owed. It’s an alternative to a consumer proposal or bankruptcy if you’re unable to fully pay off your debts, but still have the means to make partial payments.
| Note: It’s important to know that these options affect your credit score negatively and are recorded on your credit report. Until a certain time has passed, it may be difficult to secure credit products. |
