Debt Consolidation Tips
It is admittedly much easier to get into debt than get out of it (a lot more fun too). While hard work and will power are necessary to get you out of debt, they aren’t always sufficient to do so. With that in mind, this article provides 6 great tips on how to
consolidate your debt…It is important to know your options and have a plan. This article outlines some helpful tips to consolidate your debt in Canada.
Useful Online Tools for Debt Consolidation
Below is a list of a few helpful online resources for debt consolidation in Canada. Some of them are services and advice that we provide and some of them come from other sources.
Our priority is for you to improve your finances and consolidate your debt. You employing our particular services is secondary to us:
- Debt consolidation loan application
- Custom Debt Consolidation Options Report
- How to Consolidate Debt Properly
- Easy Guide to Debt Consolidation
- 9 tips to repair and protect your credit score
- 10 tips for reducing credit card debt
- Credit counselling society
How Debt Consolidation Works
Before we get to tips on debt consolidation, we thought we would run through the process in very general terms.
If you find yourself sitting on debt across one or more financial vehicles (credit cards, back taxes, business loans, etc.) it can become difficult to manage – both financially and logistically.
When you consolidate your debt, you essentially take out another loan at a lower interest rate. The funds from this loan are used to pay off your other loans. This makes the payment process easier and, most importantly, lowers your interest rate and your monthly payments.
Additionally, a higher proportion of your monthly payment then goes to principal, allowing you to raise your credit rating and lower your debt faster. At the conclusion of the loan (they are typically 6-12 months); the goal is to roll the debt once more into a traditional mortgage or other, even lower, interest rate loan.
It is important to keep in mind that you are not going into debt to get out of debt. You are simply transferring debt. This actually lowers the number of loans you have and helps you reduce your debt more quickly.
1. Know Your Options
There are several vehicles for debt consolidation in Canada. Each of which has its own pros and cons:
- Consolidate your debt using a debt consolidation loan – Debt consolidation loans are typically 6-12 month term, interest only loans. Interest rates will be higher than a typical mortgage, but substantially lower than credit card interest rates.
- Consolidate your debt using a home equity loan – This is similar to a debt consolidation loan and, in many cases, can be identical. A home equity loan is just a short-term second mortgage loan that is designed to lower your interest rate and improve your credit rating. This then allows the borrower to roll the debt back into a traditional mortgage at an even lower rate
- Use a home equity line of credit – Home equity lines of credit (HELOCs) will have higher interest rates than a typical mortgage but will have fewer restrictions as to when you pay it off. Furthermore, it allows you to draw from the line of credit as you like. This is opposed to a traditional mortgage or a home equity loan, which are traditionally lump sum loans (you take it all out at once).
- Refinance your mortgage or take out a second mortgage – This will get you the lowest interest rate of any debt consolidation option. The downside is that they can be difficult to get, especially for the self-employed. We will always try to put you with this option first. If you are looking for debt consolidation services with another firm, make sure to inquire about getting a mortgage to refinance or second mortgage with a prime lender before proceeding with alternative options
- Consolidate across credit cards – This is probably the least appealing option. You may have multiple credit cards. If one has a notably lower interest rate than the others and also has a capacity (not near its limit), you could transfer debt from your other, higher interest cards, to your lowest interest card. Be aware, however, that this often comes with a fee. You need to calculate whether the money saved on interest payments is more than the size of the fee.
- Borrow from friends or family – This will (hopefully) have the lowest interest rate of an option, but can make Thanksgiving dinner a little awkward.
2. Decide if Debt Consolidation is Right for You
If you are a homeowner, then debt consolidation will allow you to draw down some of your equity, which helps get you a lower interest rate.
If you are sitting on a number of unsecured debts, then debt consolidation is likely the right option for you. If, however, your loans are secured, then they are likely lower interest-bearing debts and debt consolidation may not be of much help to you.
At the end of the day, the central question is: will debt consolidation save me money? You need to make sure that you are moving your debt into a lower interest rate and that the difference is sufficient enough to make it worth your while.
3. Pay Off Your Highest Interest Loans First
This is admittedly obvious but bears saying because it is so important. If you are taking out a loan that is sufficiently large enough to consolidate all of your debt, then this point is moot. If, however, you can only take out a loan large enough to cover a proportion of your debt, you will need to decide which debt to consolidate.
Always consolidate debt on your highest interest rate loans first.
4. Have a Plan
You wouldn’t turn on the oven with no idea of what you are going to cook and expect a good meal, would you? So don’t expect your financial goals to turn out any better than that dinner would if you don’t have a good plan. A good financial plan should have a few key aspects:
- Firm, definable goals – Don’t just “try to reduce your debt”. Aim to eliminate all of your debt. You should also set sub-goals – milestones to be achieved along the way. This helps keep you motivated and lets you track your progress.
- Have deadlines – There is no point to a goal if it has no timeline. Otherwise, it is just an aspiration. That being said, you can’t just pick a date at random, which leads us to the next point
- Be realistic – Setting yourself up with unachievable goals will only discourage you. Being realistic about reducing your credit card debt is a good Segway into our next section.
5. Be Diligent
Debt consolidation lowers your interest payments and, in some cases, debt consolidation loans are interest-free. The combined result is a lower minimum monthly payment. It can be tempting to use the difference to spend more on other things, especially if you have been hard pressed to make your payments in the past. Now isn’t the time to let up though. We recommend you take that difference and apply it directly to your principal, thereby reducing your debt faster.
If you are looking for some tips to reduce your debt more quickly, click here
6. Consider Using Cash
Once you have consolidated your debt, consider paying for things with cash while you pay down your debt. An interesting study out of MIT found that switching to the use of cash made participants more cognizant of their spending, resulting in a reduction in total spending.
Debt consolidation can be a great way to lower your interest rates, improve your credit, and get out of debt sooner. Like everything in life, however, it is not a panacea and isn’t the best solution for everyone. It requires thoughtful deliberation, dedication and a bit of hard work on the borrower’s part.
Want to Know More?
If you have any questions about debt consolidation or any other service we offer, just give us a call or send us an email:
- 1-844-EQUITY1 (378-4891)
Interested in consolidating your debt? You can apply online. It’s quick, easy, and you are under no obligation!
I Want to Know More, But I Don’t Want to Apply
Fair enough. If you would just like to explore your options further, you can fill out some basic information and one of our agents can assess your situation and answer any questions you might have. You are under no obligation.