Multiple, high-interest debts not only cost in terms of money but are hard to manage. Moreover, the vicious cycle of accruing interest adds more woes. This is why more and more borrowers in Canada are choosing debt consolidation.
Debt consolidation offers an excellent opportunity to consolidate multiple debts into a single, low-interest payment. So, whether it is a large credit card outstanding or unsecured mortgage, it is a viable option to consider.
To consolidate your debt, you can tap the equity in your home or get a home equity line of credit (HELOC). However, like other loans, there are certain advantages and downsides to this option as well. Read on to learn about the best debt consolidation options in Ontario.
What is debt consolidation?
In simple terms, debt consolidation is availing of a big, low-interest loan to pay off multiple debts. It helps the borrower to settle their multiple obligations in one go. As a result, they have to pay a single monthly payment.
Debt consolidation makes multiple monthly payments more manageable, saves thousands in terms of interest rate, and helps to pay off debt faster.
How debt consolidation works in Ontario
For debt consolidation, you have two options:
- Agree with a lender to settle your debt on your behalf.
- Take out a big loan to pay off all debts yourself.
In both options, you consolidate your debt into a large, single monthly payment. Here is a list of loans you can consolidate into one:
- Student loans
- Auto loans
- Credit card outstandings
- Unsecured, high-interest mortgage
- Personal lines of credit
6 ways to consolidate debt in Ontario
Here are some debt consolidation options for you:
Home equity loan
Also known as a second mortgage, this option is the fastest and most convenient way to secure the lowest interest rates. It uses your equity in the house as collateral to secure you a loan. Home equity is the current market value of the house minus all obligations. Here is a simple illustration for better understanding.
- The current value of your house: $100,000
- First mortgage balance: $50,000
- Your home equity: $50,000 in equity
You can use this equity to secure a low-interest loan. However, it is important to note that you should have some reasonable home equity to get approved for a second mortgage.
Line of credit
A line of credit from banks or credit unions is another viable option to consolidate debt. Like a credit card, when you get a line of credit, you pay interest only on the tapped amount. You can secure a line of credit by tapping into your home equity ( HELOC), or lenders may offer an unsecured one if you are financially strong and have a good credit score.
HELOC can offer a line of credit equivalent to 80% of your home’s equity. However, it is not a lump-sum amount. Rather you get a line of credit that reduces upon usage. Similarly, on payment, the credit line gets restored.
Debt consolidation loan
If your finances are strong or have adequate collateral to offer, a debt consolidation loan is an excellent alternative to a home equity loan or HELOC. You can approach any bank, credit union, or private lender to secure this loan.
The lender may offer you an option to pay off your debts on your behalf or give you a lump sum to settle your debts. But, the interest rates of debt consolidation loans are not as low as mortgages or HELOCs. Moreover, it heavily depends on your credit score and type of lender.
Credit card balance transfer
For a certain period, credit cards often offer low-interest balance transfers. You can use this balance to pay off high-interest loans. However, the major downside of using credit card balance transfer for debt consolidation is the risk of doubling your debt. You can use this equity to secure a low-interest loan. However, it is important to note that you should have some reasonable home equity to get approved for a second mortgage.
It means if you do not pay off the transferred amount within this low-interest promotional period, you end up paying regular credit card interest rates.
Low-interest rate credit cards
If you are disciplined enough to pay a set amount monthly, using a low-interest rate credit card is also a viable option for debt consolidation. In this case, too, you have to prove your creditworthiness to secure a low-interest rate credit card. Furthermore, you must keep paying more than the monthly minimum due amount to pay off the debt quickly.
Debt repayment program
Lastly, if you do not qualify for any type of debt consolidation loan and it becomes difficult to manage monthly payments, consider a debt repayment program such as a consumer proposal.
Such programs help people in certain financial situations become debt-free in 5 years. As a financial relief, these programs eliminate interest and consolidate multiple debts into one affordable monthly payment.
Advantages of a debt consolidation loan
- It makes multiple debts manageable. You only have to track one monthly payment rather than multiple small ones.
- A borrower can save money in terms of lower interest rates. However, you have to secure a lower-interest-rate loan to get this benefit.
- You can become debt-free faster by paying large monthly payments. A low-interest rate debt consolidation ensures you pay off the outstanding principal faster.
- Streamlining your finances ensures complete peace of mind. So, it is a great way to remove the financial burden and become debt-free faster.
Is a debt consolidation loan good?
The answer depends on your situation. However, a debt consolidation loan is a good option if:
- You secure a low-interest rate loan or mortgage.
- You do the math to weigh out prepayment penalties for breaking existing contracts and additional charges for a new loan or mortgage.
- You are financially responsible enough to utilize this new relief judiciously. Otherwise, debt consolidation becomes another debt trap for you.
Undoubtedly, debt consolidation is a powerful tool to streamline your finances. Moreover, if you secure a low-rate mortgage, you can save thousands of dollars during your amortization period. But, it is not a permanent solution to managing your debt. You have to develop good financial habits to avoid such situations in the future.
Whatever your case may be, it is a good practice to research and compare before zeroing on a lender for debt consolidation.