Canadian Debt Consolidation Primer

debt consolidation

What Is Debt Consolidation?

If you’re struggling under large debt, you might start to feel out of control or hopeless. But that never really has to be the case! There are always steps you can take to improve your situation and start to take back control, piece by piece, of your financial life.

For some people, debt consolidation is a part of that. This is obviously not the right choice for everyone facing debt, but learning everything you can about your different options gives you the best possible chance at choosing the right one for you.

Debt Consolidation

In simple English, debt consolidation involves taking out one big loan to pay off many small loans.

Why would you want to do this?

Small loans typically have high interest. For example, if you buy a $3,000 TV from a major retailer on credit, they will charge you a very high interest rate. But if you take out a $25,000 student loan, you will get a better interest rate.

So debt consolidation is really about increasing your leverage with the primary goal of lowering your interest rate.

The key benefits of debt consolidation are:

  • Lower interest rate means you get out of debt faster.
  • It’s easier to plan for one payment each month.
  • You can use your assets (such as a home) to secure a lower interest rate.
  • You protect your credit rating

The cons of debt consolidation

Debt consolidation does have a few disadvantages.

You may save on interest charges, but will still have your debt. So, you will still have to work hard to repay the money you borrowed.

A few other things to be careful about:

  • You may still have access to your credit cards — don’t be tempted to use them and go further in debt.
  • Financial institutions will expect prompt payments and if you found the debt hard to pay before it may still be a challenge to repay the new consolidation loan.
  • If you used a co-signer, you may leave your co-signer struggling to pay your debts if you cannot pay them.
  • If you have used your house as collateral you can risk losing your home if you are unable to make the loan payments.

Over the past five years, there are fewer and fewer unsecured consolidation loans given. This is because the bank that gives you the loan takes on all the risk of losing it if you cannot pay it.
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Add the Debt to Your Mortgage

For some people who already own a home, consolidating their debt is easier by tacking it on to their current mortgage. This allows your lenders to see you as more established and responsible, and by having a larger total sum, you can sometimes get a lower interest rate.

These decisions need to be made carefully by considering your full financial situation, which is why it’s wise to talk with someone who understands the world of debt consolidation as well as your personal situation to give you the best advice about if this is the right step for you.

To consolidate all of your debts, your first option would typically be to approach your bank or credit union and see if they can help you.

If you have a mortgage, you might look to see if you have enough equity in your home to consolidate your debt with your mortgage. This is usually people’s preferred option since mortgage interest rates are usually much lower than other loan interest rates, and mortgages can be amortized (paid) over 25 years. This means you can arrange much lower monthly payments than with another type of loan. If you do choose to go this route, you should make sure that you try to pay off this extra mortgage as quickly as possible and don’t do this very often. If you find yourself doing this every year or two, that means that you are spending more than you make, and it is going to take forever to get your mortgage paid off at this rate.
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Have you ever considered debt consolidation? What does your debt landscape look like right now?

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