Best Debt Consolidation Loans in Canada

Best Debt Consolidation Loans in Canada

As a resident of Canada, if you’re looking for options to help you consolidate your debt, you’ll find 8 different channels. Each of these options has its upsides and downsides, but you can find the specific kind that matches your financial situation and also helps you get out of debt. Read ahead for more in-depth information about the options available along with the debt consolidation companies and financial organizations that offer them to you.

For instance:

  • Consolidating debt by borrowing funds from friends or family members
  • Consolidating debt with a Debt Consolidation Loan
  • Consolidating debt with a Line of Credit or Overdraft
  • Consolidating debt with a Home Equity Loan / Refinance Mortgage / Second Mortgage
  • Consolidating debt with your credit card
  • Filing a consumer proposal
  • Consolidating debt with a Debt Management Program
  • Consolidating debt with a Debt Settlement

Consolidating Debt by Borrowing Funds from Friends or Family Members

If you find yourself in debt, the first option is always to look for help from family members and friends. Depending on your relationship with them, you can consider asking them for the money. However, do keep in mind that there is the possibility of you complicating your relationship with them. And considering this factor, they may choose to turn you down. In case you pay back the money, the lender may feel awkward about taking the money back.

In case you cannot pay back the money, you stand to potentially lose your friendships. Your friend or family member might choose to forgive the loan and maintain their relationship with you or things could turn sour. Before you decide to ask the people in your immediate circle for help, make sure you assess the relationship and how you and the lender are likely to view each other in case money and possibly, non-payment is added to the equation. If you think you’d end up losing people, it is best to look for external options.

Consolidating Debt with a Debt Consolidation Loan

In place of having to pay individual creditors, you have the option of borrowing funds from a credit union, bank, or any other financial institution and paying back all the other debt. This way, you’ll have consolidated or compressed the debt in a single loan and creditor. Now, you’ll only need to keep track of the payments you need to make to this lender. Getting a consultation with the bank or credit union is free of cost. You only need to fill out an application form and have the bank or credit union representative assess your financial situation. Even if they cannot offer you a loan, they may be able to provide you with guidance on the best options open to you.

Understanding Rates of Interest on Debt Consolidation Loans

Should you approach a bank or credit union, you can get a Debt Consolidation Loan at affordable interest rates. Banks may offer you Debt Consolidation Loans at 7% to 12% whereas other institutions may charge rates of 14% for a secured loan or 30% or more for an unsecured loan. Several factors can influence your eligibility and the rate of interest you’ll pay. For instance:

  • Your credit score
  • Your past dealings with the organization
  • The collateral or security you can offer for the loan. It should be a tangible asset that the lending organization can sell or liquidate and recover the funds if you cannot make the payments. For instance, a boat, a new model car or any other vehicle, or a term deposit other than a retirement fund.

Positives of Getting a Debt Consolidation Loan

  • You can consolidate your debt into a single loan and make one monthly payment towards it.
  • You’ll pay a lower rate of interest so you save money and become debt-free sooner.
  • You can typically clear your debt in a fixed period of around 2 to 5 years.
  • These services typically charge you a low fee.

Downsides of Getting a Debt Consolidation Loan

  • You’ll need to show a good credit score.
  • You’ll have to provide some kind of collateral or security.
  • You may have to pay higher rates of interest on a Debt Consolidation Loan as compared to a Home Equity Loan where you’ll refinance your home.
  • If you don’t have any collateral, you may have to pay higher rates of interest on the Unsecured Debt Consolidation Loan. Typically, banks will not approve a loan if you don’t offer any security. However, if you can show that you have a high net worth with a higher value of assets against your debts, you could qualify for the loan you need. In addition, having a good credit score and a cosigner with a high net worth helps in your eligibility.

Qualifying for a Debt Consolidation Loan

To qualify for a Debt Consolidation Loan, you may have to meet certain conditions:

  • The bank or any other lending institution will need to see that you have a good credit score without any negative notations on your credit report or late payments.
  • You’ll have to show that you have adequate income to cover the payments.
  • You may have to offer security or collateral for the loan.
  • The monthly minimum payments must not be too high.
  • If you cannot meet any of the above conditions, you’ll need a cosigner.

In case you cannot meet any of these requirements, it is best that you consider other options or discuss your situation with a non-profit expert Credit Counselor.

Consolidating Debt with a Line of Credit or Overdraft

A short while ago before the recession, banks were more open to permitting lines of credit for $5,000 to $20,000. But, with the changes in the global economy, getting a line of credit may be a lot harder. Depending on the bank’s current lending policy which, in turn, changes according to prevailing economic conditions, they may allow you lines of credit and overdrafts that are secured or unsecured. By getting a line of credit or overdraft, you’re essentially converting your debit card into a credit card so you can make payments even if you don’t have the funds in your account. Similar to a credit card, you can make minimum payments at the end of each month.

You’ll have to check with the bank or credit union for the eligibility criteria when you apply for a line of credit. Here are the typical conditions you may have to comply with:

  • High credit score
  • High income levels
  • In certain cases, a high net worth

Understanding Interest Rates for Lines of Credit or Overdrafts

Although lines of credit and bank overdrafts are similar in nature, you might have to pay higher rates of interest on an overdraft. For instance, banks and credit unions may charge you more than 20% interest in addition to a monthly fee just as you would pay for a credit card. However, interest rates on lines of credit are fixed according to the current prime interest rate set by the Bank of Canada and vary accordingly.

For instance, your bank may offer you a line of credit at interest rates of Prime+2%. Accordingly, if the current prime rate is 1.5%, you’ll pay interest rates of 3.5% where 1.5% is the Prime Rate and 2% is the bank rate. Given that the prime rate in recent times has been very low, people have been paying interest rates of as low as 1% on their lines of credit. However, the bank may also set your rate according to other factors such as credit scores and net worth. For this reason, some people may end up paying interest of up to 8% for a line of credit.

Positives of Getting a Line of Credit or Bank Overdraft for Debt Consolidation:

  • You’ll pay the lowest interest rates possible on a line of credit.
  • You’ll avail of a flexible minimum monthly payment system.
  • You can make payments as and when it is convenient for you.

Downsides of Getting a Line of Credit or Bank Overdraft for Debt Consolidation:

  • You will have to keep a careful track of your expenses and commit to paying off a fixed amount each month. This amount must include the minimum payment in addition to an amount towards the consolidated loan. If you’re not careful, you can quickly accumulate more debt.
  • Given that the rates of interest on lines of credit are dependent on the prime rate set by the Bank of Canada, you must be prepared for the possibility that the prime rates go up significantly and you’ll have to make high minimum payments that you can’t really afford.
  • Should you opt for the bank overdraft facility, you may find that it works out to be more expensive than a credit card because of the high interest rate combined with monthly fees.

Consolidate Using a Home Equity Loan / Refinance Mortgage / Second Mortgage

If you have a mortgage and you’ve paid off a part of it, you may own some amount of equity in your home. You can borrow against this equity to pay off a debt you owe. Such loans are called “second mortgage,” “refinancing your home” or “home equity loan.” For instance, in case your house is worth $500,000 and the existing, unpaid mortgage is for $300,000. Accordingly, you own equity worth $200,000 and the bank can allow you to take out a home equity loan against the portion of the house you own.

The second loan is treated as a debt consolidation loan and you would have two mortgages to pay off. For more information on how this system works, it’s best that you contact the lending bank or institution.

Understanding Rates of Interest on Second Mortgages

When looking for a second mortgage from the bank (assuming you’ve contacted the bank where you have the first mortgage), you may or may not be able to get the same rates of interest. Check with the bank for added information on the rates they’ll offer you. Here are some in-depth details you might find useful:

  • You may have to pay a higher rate of interest on the second mortgage. On the onset, it may seem like something you want to do to consolidate your loans into a single loan. However, keep in mind that given the high rates of interest, it might be difficult to keep up with payments. Look for other more economical options soon.
  • You have the option of working with your bank and organizing both mortgages so that they have similar due dates. As a result, when it is time to renew the two mortgages, you may be able to combine them and request for the best interest rate the bank can offer you.
  • Since the early 1980s, when mortgage rates reached their highest levels at more than 20%, rates have been steadily dropping. At present times, you may be able to get mortgages at interest rates of 2% to 5%. Over the last 60 years or so, mortgage rates have remained at an average of 8.95% and experts expect the rates to rise in the coming years. Accordingly, it is advisable to estimate that the average rate of interest you may have to pay will be around 9%. In this way, you’ll remain prepared for the payments you may have to make.
  • In place of getting a second mortgage from the bank, you could consider getting a home equity loan through a finance company or a sub-prime lender. In this case, you can expect to pay interest rates ranging from 14% to 30%. These lenders typically make loans to people involved in riskier financial situations that banks may not want to cover.

Positives of Getting a Second Mortgage for Debt Consolidation:

  • Low rates of interest
  • Payment terms are flexible. You have the option of combining payments on the first and second mortgage and create an affordable payment system. Of course, you may have to extend the amortization time or the time within which you must clear the mortgage loan.

Downsides of Getting a Second Mortgage for Debt Consolidation:

  • To get a second mortgage, you’ll need to have adequate equity on your home.
  • Your bank may have a minimum second mortgage amount like for instance, $10,000. If you’re looking for smaller sums, you might have to look at other options.
  • You’ll have to pay a fee to cover the charges for processing the second mortgage.

Consolidating Debt with a Low-Interest Credit Card

Chances are that you’re unable to go with the options listed above like, for instance, getting a debt consolidation loan, or line of credit. Or, you may think that the interest rates are higher than what you’re comfortable paying. In that case, consider getting a credit card that carries a low rate of interest with a small minimum payment and pay off your debts using this card.

Many companies offer you low interest for a promotional period and you can make use of this advantage. Say, the minimum monthly payment on a card is $100. If you make payments on it for $500 or more, you can clear your debt in a short while. However, do commit to paying off the balances each month and consolidate and clear the debt within the promotional period. Once this period ends, you’ll pay the regular high interest rate and the debt could add up again. Of course, to qualify for the low interest promotion, you may have to show a high credit score.

Positives of Using a Credit Card to Consolidate Debt:

  • You can scout around and find a credit card that carries the lowest interest rate along with a low-interest promotional period.
  • You can transfer all your debts to the single card and make payments from this source. In this way, you’ll have a clear view of the debt you owe.
  • You can manage payments according to the funds you have available. In case you cannot make high payments in a particular month, you can get by with the minimum payment.

Downsides of Using a Credit Card to Consolidate Debt:

  • Should you opt to pay off your debt using a credit card, you’ll need to budget and plan your income and expenses carefully. Further, you must pay back high amounts on the credit card or you could accumulate more debt that can take years to clear.
  • Qualifying for a low-interest credit card can be a problem.
  • The low-interest promotional period only lasts for a fixed time and you must pay off the debt in this time. If not, you could end up paying high interest and incurring further debt.

Best Low Interest Credit Cards for Consolidating Debt

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Filing a Consumer Proposal

In case you’re not eligible for a debt consolidation loan or debt management program, you may have to file for bankruptcy. Alternatively, you can opt for the legal process called filing a consumer proposal under the management of Bankruptcy Trustees. When you work with this personnel, they’ll reach out to your creditors with a “proposal.” This proposal requests that they settle for part payment of the debt you owe them. If they do not accept the deal, you may have to consider other options including bankruptcy. Several factors come into play for the proposal to work:

  • The total number of creditors holding more than 50% of your debts must agree to the proposal.
  • If your creditors accept the deal, you’ll need to pay back less than the total amount you owe.
  • You’ll have to clear the debt within 5 years of the proposal getting accepted.
  • If you’re unable to honor your commitments, the consumer proposal deal no longer stands and you can’t apply for another. The last recourse is filing for bankruptcy.

Positives of Choosing a Consumer Proposal for Debt Consolidation:

  • You won’t have to pay any interest.
  • You can become debt-free by paying less than the amount you owe.
  • You avoid filing for bankruptcy.

Downsides of Choosing a Consumer Proposal for Debt Consolidation:

  • At least 1 out of 5 debtors will need to apply for the program again in the future.
  • At least 50% of your creditors must agree to the proposal. If they don’t accept, you may have to opt for other debt consolidation channels.
  • Once you initiate the legal process, you cannot stop it in-between.
  • You may have to pay initial and recurring fees in addition to the debt payments.
  • The fact that you opted for a consumer proposal will be noted on your credit report and brings down your credit rating. Opting for the consumer proposal will continue to impact the scores for the next 3 years. Given that a typical consumer proposal program lasts for 4 to 5 years, you’re looking at 7 to 8 years of negative impact.
  • In the first 6 months of opting for a consumer proposal, the law mandates that you receive 2 sessions of counseling for managing your finances and budgeting. If you need further guidance and advice, you’ll have to get financial guidance on your own.

Consolidating with a Debt Management Program

If the above-listed debt consolidation channels don’t match your financial situation, you can consider opting for the Debt Management Program. This program consolidates all the debt you owe into a single payment system that you make each month. You must make these payments to the credit counseling organization you’re working with. And, they will make payments to your creditors as they see fit. The only condition is that your creditors should accept the deal.

Typically, creditors agree to the arrangement on receiving a proposal from the non-profit credit counseling organization if it demonstrates that the deal is the best option given by your financial situation. Most debtors are able to pay off their dues within 5 years and if you can make larger payments, you can become debt-free sooner.

Understanding Interest Rates on Debt Management Programs

  • Working with a reliable non-profit credit counseling organization: You may have to pay zero interest or very low interest rates. That’s because most creditors accept interest-free payments. You may also have to pay a small processing fee for the Debt Management Program.
  • Working with a for-profit credit counseling organization: You may have to pay higher rates of interest. Keep in mind that although you may have to pay high upfront fees that can go up to thousands of dollars, the services do not have the same level of efficiency that non-profit organizations offer. Many creditors will not work with them or permit the low interest rates that they accept from non-profit credit counseling programs.

Positives of Using a Debt Management Program

  • You’ll have an improved quality of life with stronger personal and professional relationships thanks to the relief you’ll get from the stress of having to owe a large debt.
  • You’ll pay very low or no interest.
  • Having completed the debt management program, after 2 years, your credit report and credit score will be entirely repaired.
  • In addition to advice and guidance, non-profit credit counseling organizations provide you with personal assistance, credit education and budgeting workshops.
  • You’ll likely pay off your debt within 3 to 5 years at the very most.

Downsides of Using a Debt Management Program

  • The fact that you’ve opted for a debt management program will remain visible on your credit report for 2 years.
  • You’ll have to get your creditors to approve the payment arrangement for the program to work.
  • You may have to pay high charges if you only have the option of working with a for-profit organization.

Before opting for a debt management program, find out all the information you can. You may also want to consult with a non-profit, expert debt counselor for guidance on whether the program is suitable for your financial condition.

Consolidating Debt with Debt Settlement

If you’re considering debt settlement to clear your debt, approach the program with caution. Here’s why:

Debt Settlement Prior to October 2010

Prior to October 2010, most Canadian debtors would choose to use the debt settlement strategy to pay back their dues. In case they owed a large sum of money and received a big amount of cash, they could contact their creditors and offer them a deal. Accordingly, they could pay back a sum that was less than the original debt and clear the dues in full. If the creditors felt that the lump sum was acceptable, they could receive the amount and close the matter. By choosing this program, you could pay back 50% to 80% of your dues and become debt-free.

The only downside to this system was convincing the creditors to agree. So, debtors could work with a non-profit credit counseling organization that would approach the creditors and come to an agreement. A second problem was that debtors would have to come up with the large sum of money for the settlement to take place which was an almost impossible task.

Debt Settlement After October 2010

In October 2010, the Canadian media exploded with multi-million dollar advertisements from U.S. based companies of a new form of debt settlement. By contacting an “expert negotiator,” you could reach a settlement with your creditors where you could stop making payments altogether and instead save up all the money you can. Next, you could make a lump sum payment to the creditors and clear the debt entirely.

The U.S. government received several complaints from consumers who had opted for the program. On investigating the matter, they came across various discrepancies in the system. Eventually, the U.S. government passed a law that prevented for-profit debt settlement companies from charging any kind of fee for their services before they actually concluded the matter and settled the debt for their clients. Here are some of their findings:

  • As the US Federal Trade Commission found, only 10% of the people who signed up for the debt settlement programs completed them with successful results.
  • For-profit debt settlement companies charged high monthly fees of different kinds to their clients for negotiating deals. At least 65% of these deals never materialized.
  • Clients often ended up paying two or three times the amount of the actual debt they settled.
  • Clients would take a long while to save enough cash to settle the debt. And since they continued to accumulate additional debts like late fees, interest on credit cards, and other penalties, the actual debt amount became double or triple the original amount due.
  • Creditors would not wait for the debt settlement. Once the monthly payments stopped, they would initiate collection processes like hiring a collection agency or suing the client in a court of law and applying for a judgment. Creditors would also resort to practices like getting a lien on the debtor’s houses or seeking garnishment of salaries and wages.

If you come across any such companies promising to help you with debt settlement, you might want to be wary of them. Know that while these companies may continue to advertise their services in Canada, their activities are now illegal in their home country. An advisable solution is to sign up with a Canadian non-profit credit counseling organization that will work out a settlement for you only if it is in your best financial interests. However, be prepared to pay a fee that is typically a percentage of the debt you settle.

Understanding the Terms of Debt Settlement

Here are the typical terms of a debt settlement program:

  • Having worked out a settlement with your creditors for a specific amount, you must pay these dues before the expiry date of the settlement.
  • Once you pay up, you won’t need to pay any additional interest or fees.
  • As long as you have the agreement in writing, your debt is considered settled in full.
  • Most debt settlement amounts vary from 20% to more than 80% of the total sum owed. Several factors come into play here. For instance, if you have a disability or a serious illness or condition because of which you cannot work again, your creditors might settle for a low sum. But, if they suspect that you’re just trying to get the debt waived in part or full despite having the capability to pay, they may not agree to settle.

Positives of Getting a Debt Settlement

  • You may be able to pay a fraction of the amount you owe and become debt-free quickly.
  • If you choose to work with a non-profit debt settlement institution, your credit score will be reinstated after 2 years.

Downsides of Getting a Debt Settlement

  • You will have to come up with a large amount of money to settle the debt.
  • As the US Federal Trade Commission reports, debtors working with for-profit institutions have a success rate of less than 10%. Also, keep in mind that 65% of debtors paid the fees but did not get any services in return.
  • Should you choose to work with a for-profit settlement organization, your credit score will not get repaired until 6 to 7 years.

Your Best Option? Consult a Non-Profit Credit Counselor for Expert Advice

Having explored all your options, if you still can’t find a workable solution, consult a non-profit Credit Counselor for advice. This guidance is provided to you free of cost and it is advisable that you don’t delay coming to a decision. Longer delays will mean that the interest will continue to accumulate and add to your debt. With their extensive experience in the finance and debt industry, credit counselors are the best people to discuss your situation regardless of how complicated it is. A further advantage is that most creditors are confident about working with professional non-profit consultants so you can arrive at an agreement more easily. Here’s how the personnel will proceed:

  1. You’ll receive assistance in creating a budget.
  2. You’ll get a clear view of your options given your current financial situation.
  3. You can discuss the positives and downsides of each option and if it will work for you.
  4. You’ll arrive at a plan that can help you sort through the finances.
  5. You’ll receive a payment structure that can help you clear your debt in the shortest time possible.

Consolidating your debt and clearing all your dues may seem like an insurmountable task. But with some expert guidance, smart thinking, and careful budgeting, you can make it happen.