Are you currently making more than one debt payment a month? Is your high-interest credit card debt keeping you awake at night? Are your loan payments too much to handle?
If you answered yes to any of these questions then it’s time for you to take control of your debt. While there are a variety of debt relief products and services available to Canadian consumers, a debt consolidation loan could be the solution you’ve been looking for.
How Does a Debt Consolidation Loan Work?
Debt consolidation is achieved by grouping all of your smaller debt accounts and paying them off with one larger loan. The advantage of consolidating your debt is that usually small loans are obtained at high-interest rates, while large loans are obtained at lower interest rates. By consolidating (grouping) your smaller debts and paying them off with a larger loan you will benefit from a lower interest rate and thus lower monthly payments.
With a debt consolidation loan you’ll be able to:
- Streamline your debts into easy to handle fixed installments
- Save money on interest
- Tackle your debts on your own and have a sense of accomplishment
- Have peace of mind that you’re working towards a debt-free life
What Type of Debt Consolidation Loans Are Available to Canadians?
Leverage Your Home’s Equity
If you currently own a house then you can use your home’s equity to consolidate your debt. Your home’s equity is the portion of your home that you actually own. This means that if your home is worth $250,000 and you’ve paid off $100,000 of your mortgage, you currently have $100,000 worth of equity in your home.
You will use your house’s equity, as collateral, to gain access to your equity (the $100,000) to consolidate all your debt under one new loan. This is obviously only an option for those who have a mortgage and own a house but it can be a great option for someone struggling to get their debt under control.
To learn more about building home equity in Canada, check out this article.
Leverage Your Car’s Equity
Just like your house, your vehicle has equity. If you need a rather large debt consolidation loan, your car’s equity probably won’t cover it, but for those that don’t own a house, leveraging the equity of a car is a good option.
Chose an Unsecured Loan
If you have no assets that can be used as collateral against a debt consolidation loan then you might want to consider applying for an unsecured loan. Unsecured loans are typically smaller than secured loans; the maximum amount is usually around $15,000. Unsecured loans come with a higher risk for the lender than secured loans, so make sure you know what is required of you before you apply.
Advantages of a Debt Consolidation Loan
Here are some of the advantages that come with taking out a debt consolidation loan; they should help you make the best choice for you and your financial situation.
- Your payments will be fixed installments that are affordable and easy to remember
- Often you’ll be able to consolidate at a lower interest rate
- You’ll know the exact amount of time it’ll take to pay all your debts off
- Services charges and extra fees are typically very low
Disadvantages of a Debt Consolidation Loan
While a debt consolidation loan is a great option for many consumers, this option is not without its disadvantages. Here are some of the disadvantages you should know about before you make any decisions.
- Collateral is often required
- A decent credit score is not required but is definitely a plus
- An unsecured debt consolidation loan can come with a high-interest rate
- You’ll still have to pay off the full amount debt you owe; you’re simply making it easier on yourself
Did you know that there are more than 20 ways to secure a loan? Learn more here.
What Are Your Chances of Being Approved For a Debt Consolidation Loan?
Like with all loans and financial products, it all depends on your unique situation. But, there are things most lenders are looking for, which can help you be prepared when applying for a debt consolidation loan.
If you approach a bank for a debt consolidation loan you’ll need to meet the following requirements:
- Not an excessive amount of late payments on your debts
- No big black marks on your credit report, like credit accounts that are in collections
- You have an income that’s high enough to handle the loan
- You don’t have an astronomical amount of debt
We know most of those requirements seem intimidating. But the good news is that getting a debt consolidation loan from a bank is only one of your options. You could instead look into getting a personal loan from a private lender or even ask someone to co-sign a debt consolidation loan.
When Should You Consolidate Your Debt?
Choosing to consolidate your debt is a big decision, that’s why it’s important to know exactly what’s going on with your finances; here are a few steps you should take before you make any final decisions.
- First, you need to identify the cause of your increasing debts.
- Take a look at your debt-to-income ratio, this is the ratio between how much debt you have and how much money you bring in.
- Don’t forget to also take into account the ratio between your monthly income and your monthly credit card bills.
Once you’ve determined what the main source of your debt is, you need to figure out the best course of action to get your finances back on track.
- First determine how long it will take you to pay off your debts if you continue to only make the minimum monthly payment.
- Now try to create a budget that will allow you to both pay for your daily necessities and make debt payments that are more than the minimum required.
- If you are unable to create a budget that works then you probably need to consider debt consolidation as an option.
Everyone’s financial situation is different, which means that a debt consolidation loan may not be the best option for you. But, if you feel as though you could benefit from a debt consolidation loan and are interested in learning more, we can help.
Finding The Right Debt Consolidation Loan
Choosing the right debt consolidation loan and the best lender can seem intimidating, but the good news is Loans Canada can help by matching you with multiple offers based on your wants and needs.