Having a lot of debt, and multiple monthly payments, can cause stress and a feeling of being overwhelmed. If you don’t have a plan for paying off your debt, then you may never be able to completely get rid of it, and you’ll never make progress in paying it off. The good news is that you have options to help you get out of debt, and one of those options is a debt consolidation loan.
What is a debt consolidation loan in Canada?
When you have multiple debts that you need to make payments on every month, you can merge them all into one monthly repayment. This is known as a debt consolidation loan. Instead of having to keep track of many different payments (and their due dates!) you’ll only need to make one monthly payment (or maybe two bi-weekly payments) on a specified date.
Canadians across the country use debt consolidation loans to simplify and streamline their finances. Additionally, this kind of loan often comes with a much lower interest rate than credit cards and other forms of credit so it can be used to pay off debt more quickly when more of each payment is going towards the principle.
There are a few different ways you can get a debt consolidation loan in Canada, to help alleviate some of your stress, and free up some cash flow.
Refinance your mortgage
Since mortgages have one of the lowest borrowing rates for consumers, this option may help you to pay off the debt at a much lower interest rate than what you’d pay on your credit cards.
You’ll have to check to see if you have enough equity in your home to consolidate your debts, and refinance your mortgage. Under Canada’s lending laws, you can borrow up to 80% total of the value of your home. So if you have $100,000 in home equity, you could potentially borrow up to $80,000.
lf you decide to go this route, though, you’ll need to make sure you are taking into account the extra cost this will add to your mortgage. Now, if you are doing this and getting rid of the debt payments you need to make every month then the additional dollars added to your mortgage payment will not be anymore than what you’re already paying (and will likely be much less).
The important thing to remember is that if you consolidate your debt into your mortgage, you’ll need to be especially mindful that you aren’t living above your means. If you need to consolidate every 3 – 5 years, you might want to take a look at your spending and see where you can cut because you’re not actually making any progress in getting rid of debt – you’re just hiding it in your mortgage.
If refinancing your mortgage isn’t an option for you, or maybe you are just not comfortable with that option, then you can also look into a consolidation loan. And your mortgage broker can help you with this as well.
Even with unsecured loans, it is important to remember that lenders do have rules as to how much they can lend to people based on your individual factors (like income and value of your assets).
Depending on how much you have owing, a lender may not be able to lend you this much on an unsecured basis.
If getting a consolidation loan is the route you want to go, you’ll need to carefully consider what you’re doing with it. Many Canadians use this tool as a way to get out of debt, and it can be very effective. However, if you don’t address how you got into major debt or why you’re living above your means, then you might find yourself in even more debt before long. Relying on credit can become very easy to do so it’s important to make a budget and stick to it to make sure you stay on track when you consolidate your debt.
If you need help getting out of debt, it can be difficult to find ways to do it that aren’t extreme. Refinancing your mortgage or getting a consolidation loan are the more common options to help Canadians get out of debt, but that doesn’t mean they’re the only way.
If you have a lot of debt and you really don’t have a way out of it, you might want to consider downsizing to help pay off your debts. This could involve selling your home and moving into a smaller house (or apartment) or selling off some of your assets (like an RV, motorcycle or vacation house) to help take care of the debt.
This might be hard to do, but making sacrifices in the short term can help to build your future and you may be able to get these things back once you have your finances in order.
You might not want to talk to anyone about your debt situation – it’s deeply personal and some of Canadians are embarrassed about their situation. Depending on the amount of debt you have, you may qualify for a debt management program to help you sort out your finances.
These kinds of programs help you by organizing your debts into one monthly payment (similar to a debt consolidation loan) and help you get the debt paid off in a set amount of time.
Additionally, these programs can help you identify why your debt and finances got so out of hand and even help you with ideas as to how to stay on track, with tips for learning money management.
Having debt can be very overwhelming, and once you get into debt it can be very difficult to work your way back out.