With consumer debts mounting across Canada, it has become challenging for borrowers to manage their finances. This calls for a more structured approach to financial planning. However, not all borrowers possess the requisite knowledge to handle debt effectively. One must distinguish between a borrower’s ability to borrow from his ability to manage that debt.
While more Canadians can now afford to borrow large sums of money, not all are adept at managing those loans. This has left borrowers with multiple high-interest debts with limited sources of income.
Debt consolidation has emerged as a way to manage these debts effectively. Read this article for a more detailed insight into how you can consolidate your debt and 4 options to consider for your needs. You can also head on to Alpine Credits for professional guidance on debt consolidation.
What is debt consolidation?
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Debt consolidation is a tool under which you combine several loans into a single unified loan. This is done to reduce the hassle of handling multiple loans each month and secure a lower interest rate. Here is how debt consolidation can help you:
- It reduces the rate of interest you need to pay up every month. If you have been regular in your repayments in the past few years, your credit score would be favourable. This could help you secure a lower interest rate.
- It reduces the headache of managing various loans and repayments every month. This, in turn, reduces the chances of a missed installment.
- Ensure that you are regular in paying installments post-consolidation. This can help you increase your credit score over a while.
- Make sure that you do not take out any other loan until the debt consolidation loan is completely paid off. Not only will this reduce your credit score, it will also show on your credit report – reducing your creditworthiness. This could make it difficult for you to obtain credit in the future when you actually need it.
Ways to consolidate your debt
Here are a few ways you can resort to if you want to consolidate your debts into a single payment.
Home equity loan
A home equity loan essentially entails borrowing against the equity available in your home. Your home equity is calculated as follows:
The market value of your home – existing debt obligations = maximum amount
However, not all of this amount is available as a loan. Lenders often offer 70 to 80% of this amount as a home equity loan. This is known as the loan to value ratio. If you have a good credit score and a clean credit history, lenders can also offer you as high as 90% of your LTV.
The equity of your home becomes free as and when you repay the home equity loan. You can use this equity again for availing of a new loan. Thus, your home equity acts as a source of regular revolving credit. However, make sure that you do not make any default in repayment. Since the loan you take is backed by our home, you run the risk of losing it in case you make any significant default.
Credit card balance transfer
If you have mounting credit card debts, you can look for an opportunity to transfer your old balances to a new credit card. Financial Institutions often roll out offers under which they allow the transfer of old balances to new cards without any interest. Moreover, if you have a decent credit score, you may also earn a waiver on transfer costs.
You can use this interest-free period to make accelerated payments on your old debts. This will reduce the principal amount, reducing your interest cost later on.
Personal Loan
You may also opt to apply for a personal loan to consolidate all your debts. These loans can be both secured and unsecured. If you offer an asset as a security, you will have to pay less interest. However, unsecured personal loans can be costly since there is no asset backing your ability to repay the loan.
Moreover, make sure that you have a good credit score. Individuals with a poor credit history often end up paying high interest costs.
Debt management services
If none of the above methods work, you can opt for debt management services. Under this, a professional manager will reach out to your creditors to renegotiate the terms of your existing credit. This leads to a decrease in overall interest rates.
Thereafter you need to make a single payment every month to your debt manager. He will, in turn, make payment to your creditors at the renegotiated terms. You need to pay up a small fee in return for the services. However, your overall cost of loans will reduce with professional debt management.
Step to debt consolidation
Here is how you can go about consolidating all your high-interest debts.
- List down all your loan obligations along with interest rate and monthly due installments.
- Calculate your overall cost of interest on all the loans combined.
- Undertake research on various options available for debt consolidation. You must reach out to various Financial Institutions to obtain quotes on products such as home equity loans, personal loans, and credit card balance transfers.
- Carry out a cost-benefit analysis to understand the amount of interest you save in each of the above alternatives.
- Choose an alternative that works out best in terms of interest and financial convenience.
Endnote
It is easy to find yourself in a financial strangle if you do not manage your budget properly. It can often take a toll on financial and mental well-being. Thus, it is important to observe sound financial practices to avoid falling into a debt trap. However, if you find yourself in a financial mess, a debt consolidation loan can bail you out. It is essential to rectify old financial habits that led you to a financial crunch. Otherwise, you must soon find yourself struggling with multiple loans again.
Do not hesitate to reach out to professionals to seek expert advice. They can help you gauge your financial capabilities and choose a course of action accordingly.
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