Debt Consolidation Strategies for Canadians

If you have a heavy debt load, you probably have money problems, poor or average credit, and a history of missed or late payments, maxed out credit cards, foreclosures, or other serious problems.

Add the Debts to Your Mortgage

One way to consolidate existing balances is to add them to your mortgage and lower your monthly payments. To begin with, mortgage loans come with attractive interest rates because your home guarantees repayment. Consolidating high-interest balances such as credit card balances can save you thousands of dollars in charges. If you have two or more cards with rates of 16 – 20 percent and add them to a mortgage loan with a rate of 4.5 – 5 percent and a term of 30 years, you will save some $10,000 on a mortgage balance of $200,000 and $20,000 in card balances. Adding debts to your mortgage has advantages provided that you have enough equity. What is more, there are flexible options to choose from, depending on your financial situation. You can choose from different financial solutions such as home equity line of credit, home equity loan, or refinancing. Refinancing is usually offered to borrowers who are looking for ways to deal with high interest rates. Customers benefit from a structured repayment plan and the opportunity to budget and plan their payments. Another benefit is the fact that there is a fixed pay-off date. The two other options are a home equity LOC and loan so that you benefit from a lower rate of interest. In this case, the equity you have serves as a guarantee or security, and you will be offered a higher credit limit compared to other unsecured options. Another advantage is that you have a single bill to pay which means a single creditor to deal with. This makes payments more manageable and easy to remember because there is only one due date. If you have multiple balances and different due dates, you are more likely to be late on your payments or even miss one or more payments. In this case, your creditor may charge a higher (penalty) rate which will increase your balance and monthly payments. A lower rate, on the other hand, will help you to repay your balance sooner. What is more, if you opt for a home equity line of credit, you are free to draw on the line up to the available limit and make interest-only payments. As an added benefit for borrowers, they are offered an ongoing access to cash at any time.

Get a Debt Consolidation Loan

Debt consolidation loans are offered by many online services, banks and other issuers to combine multiple balances in a single account with affordable monthly payments. The interest rate is usually lower and results in reduced payments. This is one alternative to consumer proposal and credit counseling that helps borrowers to repay outstanding balances over a period of 5 years on average. There are several things to check, however, one being the amount of monthly payment. If it is less than what you pay on your card balances, then consolidated credit will help you to repay your debts. Other consumer options and alternatives to consolidation include debt relief and settlement. The first option involves negotiation with one or more creditors to secure a reduced interest rate and a lower monthly payment. Alternatively, the creditor and borrower may agree to reduce the principal amount with the goal of lessening the total debt load. Debt relief is also an alternative to consolidation whereby the creditor grants debt forgiveness for a portion or the whole debt of the borrower.

There are other options to consider, two being debt restructuring and forbearance. The former involves refinancing while the latter may be offered in the form of a split mortgage. There are other types of forbearance to consider, including interest only, reduced payment or repayment, a moratorium on payments due, and a lower loan rate. As a rule, forbearance is an option usually offered to borrowers who experience short-term or temporary financial hardship. Such customers are also offered negative-amortizing loans to make it easier to keep up with payments.

Many banks and online services offer free advice on debt consolidation and will offer a product that suits your circumstances. They will discuss your financial situation to advise you on whether it is a good idea to consolidate your debts.

Borrow from family and/or friends

Obviously, this is an option if your parents, family members, or friends are willing to help you out to make a prepayment. If they are in debt, unemployed, or in financial hardship, then you may want to look for alternatives. Ask friends or family for a loan only if you are sure that you will be able to pay them back. You can sign a contract and agree on a term of repayment and interest rate or you can ask for a no interest loan if you are close enough. In any case, there are risks involved that may sour your relationship with a family member or a close friend. If you lose your job, for example, and are unable to find a well-paid job or you get demoted, you may find it difficult to make timely payments. It is wise to ask for a small loan to cover a portion of your outstanding balance. Try to live within your means, save, cut on some expenses, find a well-paid or second job, and shop around for alternatives.

Talk to a Credit Counselor

Credit counselors offer professional advice to heavily indebted borrowers and teach them about budgeting and finance management. Credit counseling certainly helps develop healthy financial habits and avoid debt in the future, including subprime and bad credit loans. Credit counseling is beneficial in that borrowers are offered access to free workshops and educational materials. There are additional benefits for customers, whether they choose for-profit or non-for profit counseling. One is that borrowers pay a lower amount and enjoy the fact that additional charges and late fees are eliminated. Customers are free to choose from different types of services, including traditional and online counseling, the latter being a convenient way to place your finances in check from the comfort of your home. Traditional counseling, on the other hand, takes the form of on-site sessions to go in depth and learn more about personal finance. Whatever form you choose to attend, there are multiple benefits such as the opportunity to rebuild your credit score and the fact that you can transfer big bills into a single one. What is more, the harassing calls from collection agencies will be a thing of the past.

Other Debt Consolidation Strategies

The choice of a financial tool depends on the amount and type of debts you have, i.e. student loans, consumer loans, credit cards, etc. If you mostly have high interest credit card debt, you may want to shop around for a no or low-interest card to transfer and consolidate your balances. Customers who choose to do this usually go for a low rate card with a long promotional period. The promo period varies from bank to bank and can be as long as 18 months. Most issuers offer balance transfer cards with a promotional period of 6 – 12 months but it pays to shop around. Ask about the interest rate after the promo period, the penalty rate for late payments, the balance transfer fee, grace period, and other details.

Finally, bankruptcy is an alternative to debt consolidation but it is also a last resort because of the long-term negative effect on your credit score and financial situation. Your credit score will plummet and many banks will be unwilling to approve your loan or credit card application because you are a high risk borrower, especially if you have a previous history of foreclosures, delinquencies, and other major credit problems. Financial counselors recommend bankruptcy in case you have many unsecured loans, including credit cards and unsecured consumer loans. In this case, your debt will be wiped out and you can start anew. If your debt load is manageable by other means, it is recommended to try other options such as consumer proposal and debt consolidation.