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When you’re struggling with debt, keeping your monthly payments organized and manageable can be a challenge. Sometimes, paying off all your loans, overdue bills, and credit card balances can seem outright impossible.
Consolidating your debt can reduce your financial burden and make your monthly payments more manageable. Let’s take a look at the best 8 Canadian debt consolidation options and how they work.
What is Debt Consolidation?
Debt consolidation, in Canada, is the process of combining multiple debts into a single one. Juggling multiple debts, such as payday loans, unsecured lines of credit, credit card debt, student loans, and others at the same time can be difficult.
When you consolidate your debt, you combine all your existing debt into a single one, making it more manageable and lowering its interest rate.
How Does Debt Consolidation Work?
Debt consolidation means taking out a loan to repay your existing debts. Combining multiple debts into a single, larger one, might sound scary, but it’s usually helpful because it makes repayment easier.
Taking out a consolidation loan is helpful because it lowers the interest rate your debt accumulates and it also allows you to repay the debt over a longer period of time. In addition, having to make a single payment toward repaying your debt makes the process easier to manage.
Debt Consolidation Options in Canada
Let’s take a look at the X most popular debt consolidation options in Canada:
1. Debt Consolidation Loan
Some banks, finance companies, and credit unions offer debt consolidation loans. The financial institution gives you the money to bring your debts together under a single, larger loan.
Pros and cons of debt consolidation loans
|Good interest rate - you can consolidate your debt at a lower interest rate, saving you money in the long run||Require collateral - Debt consolidation loans usually require some sort of security or collateral|
|Good repayment period - you can repay what you owe over a long period of time, usually somewhere between two to five years||Require credit score - You can only qualify if you have a decent credit score.|
|Low charges - Financial institutions generally charge very low fees for this service||Interest rates can be better - Consolidation loans charge higher interest rates than other debt consolidation options|
|High interest rates of unsecured debt - Debt consolidation loans can charge high interest rates to cover your unsecured debt.|
Financial institutions usually offer good interest rates for consolidation loans. This can help you repay your debt by lowering the amount of money you have to pay back in the long run.
When you apply for a debt consolidation loan, the financial institution will calculate the interest rate of your loan based on your credit score, net worth, previous agreements with them, and whether or not you can offer a good collateral (security) for your loan. Non-RRSP deposits, vehicles, or any other assets that may be liquidated quickly offer good security.
Having a high net worth or having a co-signer that has a high net worth and strong credit score increases your chances of qualifying for a debt consolidation loan.
Most Canadian financial institutions charged an interest rate of 7 – 12% on debt consolidation loans in the past decade. However, the interest rate can go as high as 30% or more for unsecured loans.
2. Home Equity Loan/ Second Mortgage/ Mortgage Refinancing
Home equity loans, second mortgages, or mortgage refinancing are different names for the same type of loan. This type of loan allows you to lend money against the equity you have in your home.
For example, if your home is worth $350,000 and your mortgage has a value of $250,000, then you have an equity of $100,000 in your home.
You may qualify to take out a loan against the equity you have in your home to pay off your debts.
Pros and cons of home equity loans
|Great interest rates - you may be able to secure the same interest for your second mortgage as you got for your first.||Large minimum loans - Most financial institutions will only consider loans over $10,000 for second mortgages.|
|Flexible repayment period - you can usually shorten or extend the amount of time required to repay the loan according to your necessities.||Fees - You may have to pay several fees to set up a second mortgage|
|You need equity - You need to have enough equity in your home to qualify|
3. Line of Credit/Overdraft
Lines of credit or overdrafts were very easy to access several years back. Nowadays, lines of credit are more difficult to qualify for, but they can still be helpful.
You may qualify for a line of credit if you have a good net worth, a reliable income, and a good credit score. Lines of credit can be unsecured or secure, depending on the institution’s lending policy.
Pros and cons of lines of credit
|Low interest rate - Some lines of credit can offer very low interest rates||Interest linked to prime rate - The interest rate of a line of credit is linked directly to the Bank of Canada prime rate. This means that your interest rate can increase significantly if the prime rate goes up.|
|Flexible minimal payments - You can set up your minimal payments to make repaying your debt more manageable||Can be expensive - Even though some lines of credit offer low interest rates, others can charge high interest and monthly fees, making them very expensive options.|
|Flexible repayment period - you can shorten or extend the payment period to your necessities.|
4. Credit Card
You can consolidate your debts with a credit card. This debt consolidation option is not recommended because it can increase your debt by a significant amount if you miss your monthly payments. You should also try this option only if you qualify for a credit card that offers a low interest rate.
However, this method can work if you’re careful to make your payments well in advance and pay off your balance in a reasonable amount of time.
Pros and cons of credit card debt consolidation
|Good interest rate - you may be able to find credit cards with low interest rates||Difficult qualification - most people who want to consolidate their debt don’t qualify for a low-interest credit card|
|Payment flexibility - you can repay more than your minimum monthly payment to shorten the repayment period.||Interest rates may change - promotional interest rates may seem convenient, but they can change to very high interest rates after a few months|
|Can significantly increase your debt - Credit cards can significantly increase your debt if you fall back on your payments.|
5. Debt Management Programs
Debt management programs are arrangements between you and your creditors mediated by a non-profit credit counselling agency. When you’re enrolled in a debt management program, you make one monthly payment toward the counselling agency. The agency then disperses your funds to your creditors.
Your creditors must allow you to enroll in a debt management program. Some of them might be reluctant to do so, but they might agree after a negotiation with your counsellor.
Pros and cons of debt management programs
|Very low interest rates - A non-profit credit counsellor can convince your creditors to reduce your interest rate significantly||Your creditors have to agree - Your creditors have to agree for you to enter a debt management program|
|Good repayment period - you can repay your debt over a period of up to five years.||Impacts your credit score - Enrolling in a debt management plan will affect your credit score for two years after you complete it.|
|Low charges - Non-profit counsellors charge small fees for their services||Lot of for-profit companies - There are a lot of for-profit companies that charge expensive fees to consolidate your debt.|
6. Debt Settlement
Debt settlement is the process of reaching an agreement with your creditors to repay part of your debt in exchange for debt relief.
This can be a good way of eliminating your debts, but it only works if you have the money to repay much of what you owe.
Our Licensed Insolvency Trustees are financial experts who can negotiate with your creditors on your behalf. Contact us today and examine your debt relief options.
Pros and cons of debt settlement
|No interest rates - Once your creditors agree to receive a sum of money in exchange for your debt, you no longer pay interest.||You need money - You need a lump sum of money to pay off your creditors.|
|Your credit score repairs quickly - Your credit score can be repaired in as little as two years if you work with a Licensed Insolvency Trustee||Creditors need to agree - Your creditors may not agree to accept partial payment for your debt.|
|Impacts your credit score - Settling your debt impacts your credit score for up to seven years.|
7. Consumer Proposal
Even though filing a consumer proposal will not consolidate your debt, it can help you overcome debt and secure a fresh financial start.
A consumer proposal is a legally binding agreement made between you and your creditors and mediated by a Licensed Insolvency Trustee. This legal agreement offers protection from collection efforts and creates payment arrangements for your unsecured debts. The consumer proposal also protects some of your assets that may otherwise be liquidated to repay your debts.
A Licensed Insolvency Trustee will negotiate a payment plan with your creditors, convincing them to accept a partial payment for your debts. Filing a consumer proposal may reduce your debt by up to 75%, depending on your circumstances.
Pros and cons of a consumer proposal
|No interest rates - The Licensed Insolvency Trustee will negotiate a payment plan, but you won’t be charged interest.||Creditors need to agree - At least half of your creditors need to accept your proposal for it to become official.|
|Repay less - Consumer proposals enable you to pay less than what you owe.||Impacts your credit score - Filing a consumer proposal affects your credit score for three years after you complete the process.|
|Legally mandated counselling sessions - You will need to attend two legally mandated counselling sessions.|
Nobody wants to file bankruptcy, but sometimes that’s the only way to secure a new financial start.
In Canada, bankruptcy is a legal process protected by the Bankruptcy and Insolvency Act. Filing for bankruptcy protects you from collection efforts, legal action, and wage garnishments. Bankruptcy also exempts most of your personal belongings from seizure
Pros and cons of bankruptcy
|Eliminates your debt - Filing for bankruptcy eliminates your debt||Impacts your credit score - Filing for bankruptcy affects your credit score for six years after you complete the process.|
|No interest rates||You may lose assets - You may lose some of your non-exempt assets, such as RESPs, the RRSP contributions you made in the past year, your home equity if it’s over $10,000, and more.|
|Can eliminate student loan debt - Bankruptcy eliminates student loan debt older than seven years.|
Comparing All Debt Consolidation Options
|Consolidation option||Interest rate||Requires security or collateral||Lowers the amount you owe (except interest)|
|Debt Consolidation Loan||7 - 30%||Yes||No|
|Home Equity Loan||2 - 30%||Yes||No|
|Line of Credit||3 - 10%||Yes||No|
|Credit Card||Up to 30%||No||No|
|Debt Management Programs||0%||No||Yes|
Debt consolidation FAQ
Debt consolidation is the process of replacing multiple small debts with a single, larger one. Debt settlement is the process of negotiating debt repayment with your creditors.
Credit card consolidation is rarely a good idea. Credit card consolidation can be helpful only if you can access a credit card with low interest rates and you can ensure that you will pay off your debt in advance. As a rule of thumb, you shouldn’t consolidate your debts with credit cards.
There is no definitive answer to this question because financial institutions calculate your interest rate based on each individual’s credit score, net worth, income, and more. You should consult with one of our financial experts to find the right debt consolidation option for your particular needs.
Remolino & Associates can help with debt consolidation
Remolino & Associates can help consolidate your debt. Our Licensed Insolvency Trustees are financial experts who are experienced in finding the right consolidation solution for every situation.