Best Debt Consolidation Option in Canada
There are many ways to consolidate debt and each method has its own set of pros and cons. Most Canadians now prefer to use a debt consolidation loan to bring their finances back on track. If you are looking for more information about how this method works, you have come to the right place.
What is a Debt Consolidation Loan?
As the name suggests, a bank or other reputable financial company provides you with loan or money to pay off your existing debt by bringing them together or consolidating them.
Advantages of Debt Consolidation
This method is preferred by most Canadians now because:
- You only have to worry about one monthly payment
- This option normally has a lower interest rate which helps you save money in the long run
- You can repay your debt over a specified time period, let’s say two to five years
- Usually, the fee charged by the bank or financial company for this loan is very low. In the recent years, financial companies and banks have charged seven to 12% interest rate on debt consolidation loans. Unsecured loans, however, can be charged anywhere from 14% up to 30%.
Does debt consolidation loan have any disadvantages?
Well, debt consolidation option is the easiest way to get rid of the amount you owe; however, there are a few downsides.
- You are only eligible for the loan if you have a decent credit history and credit score
- Banks, credit unions, and other financial institutions usually require security
- The interest rate for debt consolidation loan is higher than that for home equity loan
- Interest rates for unsecured debt consolidation loans can be even higher
It is important to remember that unsecured debt consolidation loans from banks are rarely approved. And to qualify for one, you need to have a high net worth and a strong credit score. Some companies and banks approve unsecured loans if you have a co-signer with very high net worth.
Is Debt Consolidation Loan Option Right for Me?
This option might not work for you if your monthly payment remains too high even after consolidation. Similarly, you shouldn’t think about this option if you don’t have a reasonable security or good payment habits.
Debt Consolidation Using Home Equity Loan
Refinancing your mortgage or home equity loan can be used to get rid of debt. This loan basically refers to the money your bank or other financial institution gives you against the home you own.
For example, if your house is worth $300,000 and your mortgage is $250,000, you own only $50,000 of your home. And this loan can be used to repay your debt. While the option looks lucrative, the process isn’t simple.
On most occasions, the interest rate on home equity loans is the same as your mortgage; however, you need to talk to your bank or lending institution to know more. Presently home equity loans are charged interest rates in the range of two to five% but rates can be higher. Refer to your bank or finance company for more information.
What are the Pros and Cons of Using Home Equity Loans for Debt Consolidation?
- These loans typically have very low-interest rates.
- Payment methods are flexible; you can extend your amortization to create an ideal monthly payment.
Home equity loans have certain disadvantages as well.
- To be eligible for the loan, you need to have enough equity in your home
- You may be charged an additional fee for setting up a home equity loan or a second mortgage
- Banks, in particular, don’t like to give small home equity loans. The minimum amount banks consider is $10,000.
Consolidating Debt Using a Line of Credit
A line of credit is much harder to qualify for, but you can check with your bank or lending institution for more information. Usually getting approved for overdraft or a line of credit is easy if you have a good income and an excellent credit score.
You can get secured or unsecured line of credit depending on your situation. It’s not surprising that a line of credit is the most expensive option of debt consolidation. Your bank or financial institution can charge interest rates as high as 20%.
Another important thing you need to keep in mind is that the interest rate you are supposed to pay floats with the prime rate set by the Bank of Canada.
Advantages of Using Line of Credit for Debt Consolidation
- Monthly payments are flexible
- A line of credit gives you tremendous freedom – you can make the payments as fast or as slow as you want.
Disadvantages of using a Line of Credit
- You have to be disciplined when making payments with a line of credit or your debt will never go away. Remember that this is one reason a line of credit can be an unexpected trap for most people.
- The interest rate for a line of credit keeps floating with the Bank of Canada prime rate. If the prime rate goes up, you will be required to make higher interest payments
- The interest rate and monthly fee of a line of credit make it more expensive than any other option.
Debt Consolidation Using a Credit Card
You can consolidate all of your high-interest credit card debt onto one low-interest credit card and try to repay the debt aggressively. This method is simple because you only have to take care of only one payment.
From time to time, banks offer special credit cards with promotional low-interest rates. These credit cards offer a great opportunity as you can repay your debt in a timely fashion without having to worry about high-interest rates.
The biggest advantage of using a credit card for debt consolidation is that you can have all debts in one place. Similarly making the monthly payment on one card is easier than taking care of multiple cards.
The only downside of this option is that promotional cards have low-interest rates only for a limited time period. You should not go for this option if you cannot make the minimum payment each month.