Debt Consolidation in Canada: Best Tips For Save Money in Your Debts

help and advice for paying your bills

Debt Consolidation refers to a plan to simplify bill paying by using a combination of several means.

By 2017, some financial experts had considered Canada one of the most indebted countries in the American continent partly due to its many citizens’ lousy finance habits.

Examples of such habits include multiple lines of credit, several maxed-out credit cards, a big mortgage, as well as a significant home-equity line of credit.

According to several economists, for the last few years, this trend had been the reality of many Canadian citizens.

That is why many people find themselves drowning in debts even without being fully aware of their situation.

But those people who have a solid grasp of their financial status may look for a way to get out of their debts before it’s too late. One potential solution to these issues is Debt Consolidation.

Debt Consolidation consists of a finance process that combines all unsecured debts into a single monthly payment with lower interest.

In Canada, people have several options to consolidate their debts, each choice having its advantages and disadvantages.

Debt Consolidation Loan

This option consists of the debtors taking out a loan from a bank or a finance company to pay off the sum of their most outstanding debts.

In these cases, banks and credit unions offer indebted people the best interest rates.

However, getting a decent interest rate depends on several factors such as creditworthiness (credit score), net worth, the capability of offering good security for a loan, etc.

Good security for a Debt Consolidation Loan often consists of assets to sell or liquidate in case of the debtor becoming unable to pay to the bank, the credit union, or the company for the money they provided.

Advantages

People who choose this way only need to worry about one monthly payment. Not to mention, that it helps debtors to consolidate their debts at a lower interest rate, which ends up saving them money.

Usually, the debts get paid in the span of 2 to 5 years depending on how much people have to pay off.

The fees that debtors may pay for a Debt Consolidation Loan is typically a low amount of money.

Disadvantages

Debt Consolidation Loan usually requires good security in the form of assets to cover the money used to pay.

People with a low credit score may not be able to get a lower interest rate for the monthly payments, and when it comes to unsecured debts, interests rates become higher.

Banks rarely approve Debt Consolidation Loans for unsecured debts. The ones who do usually require the debtor to have a high net worth and significant credit score.

Home Equity Loan

Some people know this type of loan as Refinance Mortgage or Second Mortgage. It refers to the bank lending debtors money against the equity of their residence.

People who choose this way to pay their debts end up using their homes or the portion they own as “Collateral” (the assets a borrower offers as a way to secure a loan).

In these cases, some use the term “First Mortgage” to describe the loan of money used to purchase a residence.

Many times, borrowers can get the same interest rate on a Home Equity Loan as the one they got on their “First Mortgage.”

Finance companies can also provide with a Second Mortgage. However, their interest rates will always be higher than the ones banks may offer.

Advantages

The possibility of getting lower interest rates. Although, that’s not always the case.

Home Equity Loan may allow for flexible payment arrangements due to the face people can extend their amortization (the period required to pay a debt gradually) to create an ideal monthly payment.

Disadvantages

If the potential borrowers don’t have enough equity in their home, they may not receive a Second Mortgage.

Debtors may get charged with various fees for the costs involved in setting up a Home Equity Loan.

Another possible drawback of this option is the fact banks typically avoid doing small Second Mortgage.

Line of Credit

This term refers to an arrangement between a financial institution and a borrower to provide a fixed amount of credit.

Lines of Credit can be either secured or unsecured. It all depends on the financial situation of the borrower and the lending policy of the bank.

Furthermore, Lines of Credit get priced based on the Prime interest rate that the Bank of Canada sets.

Advantages

Given that Prime rates had been relatively low in recent years, Lines of Credit may offer lower interest rates.

Another benefit inherent in this type of loan is having great flexibility due to remarkably minimal monthly payments. This freedom allows borrowers to pay it off as fast or as slow as they want.

Disadvantages

People who use Lines of Credits must avoid getting used to paying the minimum amount required. Those who do may never get out of the debts to the financial institution that provided them with the credit.

A way for people to prevent falling into this trend is training themselves to pay a set amount higher than the minimum amount required.

There’s also the possibility of the Prime rates going up significantly, which would increase the Line of Credits interest rates.

In this particular case, the minimum monthly payment required may become too high for the borrower to manage.

Credit Cards

Some debtors can try to consolidate all of their credit card balances onto a single card with a low-interest rate.

After accomplishing that bit, they may proceed to aggressively pay off this card by paying a set amount each month they determine in advance.

Some credit cards occasionally offer remarkably low promotional interest rates, which may allow people to consolidate their debts.

Some credit card companies may offer people low-interest rate credit cards if they have a high enough credit score.

Advantages

Many people have the opportunity to get low-interest cards along with some occasional promotions featuring even lower interest rates.

Rolling all debts into a single amount to pay makes it easier for people to keep track of what they owe and start paying it down on a consistent basis.

Using the credit card also allows a high degree of payment flexibility as in paying an amount above the minimum required, and in case of later emergencies, fall back to the minimum payment.

Disadvantages

Low rate cards may require a high credit score, which prevents some people from getting one.

While promotional interest rates may prove useful, they only last for a few months, which could become a problem if people rely on this particular bit to keep paying their debts.

After low promotional interest rates end, the following interests may be a lot higher.

Consolidating through the credit cards only works when people discipline themselves to spend less money than what they earn and to pay an amount higher than the minimum payment.

Debt Management Program

It refers to a strategic effort organized by nonprofit credit counselling companies to help people pay off their debts with lower interest rates and single monthly payments.

A Debt Management Program consolidates all credit card payments into one monthly fee.

The debtor will have to make this monthly payment to the credit counselling organization providing them with this service so said company may disperse all of the funds to the debtor’s creditors.

Advantages

People will likely pay all credit card debts in the span of 3 to 5 years with little to no interests.

Reputable credit counselling companies typically reduce the interest rates to zero or a remarkably low value.

However, non-profit credit counselling organizations usually cover their costs by charging small fees for their Debt Management Programs.

These companies may provide with free one-on-one help, budgeting workshops, and even credit education.

Disadvantages

Creditors must agree with a Credit Counselor that this program may fit the debtor’s financial situation. If they disagree, the debtor won’t enter the program.

A Debt Management Program can also negatively impact a person’s credit score until two years after paying off the debts.

For-profit credit counselling organizations charge significantly large fees for their services.

Debt Settlement

Some people know this practice as “Debt Negotiation” or “Credit Settlement.” It’s an agreement in which a creditor accepts less than the full amount owed by the debtor as full payment.

Some even reduce the debt to 50% or 80% of the whole amount. However, creditors will only agree to such terms if they consider it’s a better option than waiting for debtors to pay them back completely.

Since such a thing rarely happens people often seek the help of credit counselling organizations to reach an agreement with the creditors.

Advantages

When creditors accept to reduce someone’s debts, that person may be able to repay far less than the original amount owed and quickly eliminate all debts.

If people work with a non-profit organization, they will likely repair their credit two years after the settlement is complete.

Disadvantages

It requires significant amounts of money. There’s also the fact that debt settlement services have less than a 10% success rate and 65% of their clients don’t get any service in return for the fees that they pay.

Debt Settlement can also negatively impact people’s credit to the point they may need anywhere from 6 to 7 years to recover.

Consumer Proposal

This term refers to a legal process that people can use to deal with their debts when they don’t qualify for a Debt Consolidation Loan or a Debt Management Program.

Bankruptcy Trustees administer these processes. They work with the debtor to develop an arrangement with the creditors so they may accept a payment lower than the full amount of the debt.

The creditors holding half of the debts must agree with the terms for the proposal to work.

Advantages

Interest rates stop entirely during this program, and it’s a nice way for people to repay less than they originally owed.

Disadvantages

The process doesn’t work if the creditors don’t accept the proposal.

It negatively impacts credit rating while the program is still running, and during the first three years after the process ends.

People will have to pay ongoing fees along with the payment of their debts. Not to mention, one person out of five people may have to repeat the program once it finishes.