Bloomberg reported in 2020 that Canadian households had a debt ratio of 170.7%.
In other words, for every dollar that Canadians made, they owed $1.70. Ouch.
If you’re seriously thinking about pursuing debt consolidation in Canada, then you’ve already seen firsthand how debt can consume your financial decisions as well as your income.
You have to cover minimum payments on your credit cards. You have to pay for that loan. You have to carefully account for every dollar because if you miss a payment, the financial house of cards could come tumbling down at any minute.
What is debt consolidation exactly? How does it actually help? Are there loan options for debt consolidation that you should be looking at?
We’re about to tell you everything that you need to know about debt consolidation and debt consolidation loan options. And then we’ll tell you how you’ll know if you’ve found the best way to consolidate your debt into one payment. Just keep reading.
Debt consolidation sounds like one of those complicated financial terms that you have to work hard to understand. But really, it’s just a way to describe the financial practice of paying off a bunch of smaller debts by combining, or consolidating, them all into a single, presumably lower, and more convenient payment.
Some of the benefits of debt consolidation include:
If every Canadian were to sit down and calculate exactly how much of their payments were going towards interest rather than principal, a lot of people would probably be surprised at the numbers.
And if you were to spread those numbers out across multiple credit cards and a car loan or two, chances are that you’d probably find a few accounts that were out there and simply not accomplishing much. Debt consolidation, by presumably reducing your interest payments to a single account, can help you get out of debt by allowing you to pay down more principal. This in turn makes it possible for you to get out of debt faster.
When you have tons of bills to pay every month and one pay cheque to try and cover them all with, you can find yourself habitually giving things up in order to afford those monthly payments.
Debt consolidation, along with the reduced interest and the speedier path to being debt-free, also often produces lower general payments overall. This in turn can put a little more money in your pocket every month. And if you’re able to save a few hundred dollars here and a couple of twenties there, you can quickly find yourself with a substantial emergency savings account and a bit of extra fun money to boot.
Sometimes what makes financial management stressful is simply the work involved with keeping track of all your payment dates. When you’ve got money coming out of your account on the 1st, the 7th, the 12th, and the 18th, you’re one off-week away from missing a payment or forgetting the amount that you’re supposed to be paying.
And with your payment history accounting for most of your credit score, one missed payment can have a catastrophic effect on your credit.
When you’ve consolidated your debt, you don’t have to be some sort of a whiz with a calendar in order to keep track of everything. You’ve brought all of it down to one payment that you have to make on a single account.
And between the on-time payments and the runway that you have when you’re making fewer payments overall, that simplicity can in turn make it a lot easier to plan your finances.
This brings us to the next point . . .
Knowing that creditors and collection agencies can start calling you at any time can do a number on your stress levels.
In 2013, the Financial Post reported that roughly 20% of divorces werecaused primarily by money. Even if you’re not married with a house and kids while in a state of financial stress, money has a way of wearing on relationships simply because you have to spend a lot of time saying “No” to the things you really want.
Debt consolidation can give you a greater sense of control over your finances. This in turn makes it easier to more honestly assess questions like, “Can I afford to go out to this restaurant with my friends?” and “Should I pass on this vacation this time?” while in a calmer state of mind.
And when you’ve been living with debt hanging over your head for a long time, that peace of mind is something that can’t be underestimated.
We’ve gone over what debt consolidation is and why it’s such a useful method of paying down debts. It’s time to go cover the “how”.
After all, debt consolidation, as a term, is really describing a general strategy. But there are several ways that you can pursue it even if each method is basically allowing you to do effectively the same thing.
Here’s a list of some of the more common methods that people use to consolidate their debts:
This is exactly what it says. It’s where you put together an application with some pay stubs and perhaps a letter of employment that you then use to request the personal loan that you would then be consolidating your outstanding debts with.
This approach does have some compelling benefits. These include:
However, it does also have its cons:
This is different from a standard installment loan in that it’s a revolving line of credit. In other words, if you pay back $10 one month, you can spend that $10 next month as long as you make your minimum payment.
The benefits of this strategy include:
However, the downsides include:
With this strategy, you’re taking out a second mortgage and using it to pay off both your current mortgage and your outstanding debts. Then from there, you just have to make your monthly house payments the same way you always have.
Taking out a second mortgage in order to cover debts may sound like a drastic move on paper. But as a financial option for consolidating your debts, it has a lot of positives such as:
The disadvantages of this approach would include:
From a common-sense perspective, this one may sound a bit counterintuitive at first. After all, paying down credit-related debt with a credit card is a sign of financial trouble, isn’t it?
However, if you take advantage of a low-interest promotional period, you can use credit card balance transfer to consolidate your debts while putting a serious dent in the amount you still owe.
The advantages of debt consolidation with a credit card can include:
But there are some disadvantages such as:
Here are some key signs that debt consolidation may not be a solid option for you at this time:
There’s a difference between “Not spending money in an ideal fashion.” and “Drowning in debt that I can’t afford.”
Debt consolidation is a solid choice if you have money and you want to streamline your payments while also saving on interest and potentially bringing down your overall payment amount. And while there’s nothing wrong with looking at debt consolidation primarily from the standpoint of wanting to lower your payments, there does come a point where a lack of money, or a debt that’s too high, could indicate that you need to pursue a formal consolidation debt relief program before you can actually begin consolidating.
What you’ll notice about all of the strategies that go into consolidating debt is that they all involve taking out more debt. In order to quality for a line of credit, a mortgage refinancing, a personal loan, or even another credit card, you need to have a solid credit score that qualifies you for approval.
After all, being denied a loan isn’t the only risk you run when you apply for additional credit without a good credit score.
It’s also possible to be approved for a loan or a credit card with a bad credit score but at a high-interest rate or for an amount that isn’t large enough to actually do the “consolidating” part of your debt consolidation plan.
As such, if you have a credit score that could result in a higher-interest offer, you may be better off paying down debt and improving your credit score before taking the next step towards consolidating.
Debt consolidation is a fickle financial tool in that it’s not enough for you to have debts. Your debts can’t be so big that you can’t pay them. And they also shouldn’t be so small that your would-be lender looks at your numbers and starts to ask you why you’re there.
Put simply, debt consolidation is supposed to be a method of reducing debt faster and streamlining payments. But if you’re talking about taking out a personal loan or refinancing your mortgage, those are debt repayment methods that are meant to last for years.
If you’re three months away from being totally debt-free, you may want to take out a line of credit for other reasons. But at that point, your debt is likely too small for a debt consolidation strategy to make more sense than just continuing to make your payments until you’re done.
For many Canadians, being debt-free is what financial freedom is all about.
You have more disposable income. More financial security. And you have more opportunities to make your money work for you.
When it comes to figuring which approach is the best for debt consolidation, Canada has a lot of options to choose from. But luckily, you can go a long way towards finding an answer if you ask yourself these three questions:
Your answers to the question, “What’s the best way to consolidate debt into one payment?” will likely differ from someone else’s. But when you have clarity, it becomes a lot easier for you to figure out if pursuing debt consolidation in Canada is an option worth exploring for you.
To find out more about debt consolidation loans, mortgages, and personal finance in general, check out Insurdinary.ca.