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What’s The Best Way To Consolidate Debt?
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Dealing with post-holiday debt? You’re not alone – over one-third of Canadian Millennials said they expected to go into debt due to holiday spending. Debt might seem overwhelming at first, but it is possible to get back on track sooner than you think.
If you want to proactively manage your debt, a consolidation loan can be a great option since it can help you pay off debt faster and save hundreds to even thousands of dollars in interest.
What Is a Debt Consolidation Loan?
A debt consolidation loan is a loan that someone obtains to pay off multiple smaller loans or debts. The benefit? Debt consolidation can usually help people secure a lower interest rate, and simplify their repayment schedule. A consolidation loan can either be a line of credit, an installment loan, or in some cases, a refinanced mortgage.
For example, let’s say someone is carrying a balance on a few different credit cards and owes money on both a personal loan and a car loan. Instead of making multiple payments a month at different interest rates, they can take out a consolidation loan to pay off all their debts at once. Then, they’ll only have to make payments on the new consolidation loan, and possibly at a lower interest rate.
Next, let’s go over some tips that can help you maximize your debt repayment efforts:
1. Choose a payment option that you can stick to
A simplified payment schedule can only work if it’s in line with your priorities. Here are some tips that can help you choose the right payment option:
- Overwhelmed by multiple payment deadlines? You’ll likely benefit from a monthly payment schedule since you’ll only have to make one, predictable payment each month.
- If the regular cadence of payments keeps you on track, and you’re looking for control over your budget, choose a semi-monthly option. Semi-monthly payments are more predictable than bi-weekly payments since you’ll pay the same amount of money each month.
- If you want to pay off your debt faster and save money on interest, bi-weekly payments are a better option since you’ll make two extra payments a year compared to semi-monthly payments.
And, don’t forget to take advantage of automated payments if they’re available. Set up automated payments on a day that’s convenient for you like your paydays. Or, stagger loan payments opposite from when other large expenses are due to keep a healthy account balance.
2. Find a loan term that matches your priorities
A longer loan term offers more affordable loan payments. On the other hand, a shorter loan term increases the amount of each loan payment, but your loan will be paid off sooner. If your budget is tight and you don’t mind taking a little longer to pay off your loan, choose a longer loan term. If your priority is to get out of debt faster, choose a shorter loan term – just make sure the higher payments fit your budget.
3. Choose a secured option for your debt consolidation loan to lower your interest rate
Take advantage of the equity in your home by securing your loan. A secured loan gives a lender more confidence that you’ll pay back the loan. As a result, you benefit from lower rates. And, you can often access more money by securing your loan.
Not a homeowner? Don’t worry – unsecured loans don’t require you to own a home to borrow money.
4. Research your options
Interested in learning whether debt consolidation is right for you? Here are some resources to get you started:
- Check out this article to learn how a debt consolidation loan works
- Find out what types of debt you can consolidate and how to apply for a debt consolidation loan
- Wondering if you qualify for a debt consolidation loan? Visit Fairstone.ca for a free loan quote – you can even find out how much money your payments could be. No obligation, no impact to your credit score.
Finding the right debt consolidation loan is an important step for your financial future. But, the next step is addressing your spending habits that landed you in debt in the first place. Once your debt consolidation loan is paid off, deposit the money you allocated towards debt repayment in a savings account. You can use the money for short-term savings goals like holiday spending or emergencies, and avoid potential debt traps in the future.
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