In Canada, one of the options available to provide debt relief is debt consolidation.
Debt consolidation simplifies the process of paying off multiple sources of debt by consolidating them into one monthly payment. There are several debt consolidation programs available in Canada that can help people pay their debts.
1. Debt consolidation loan
This is a special type of loan that you can take out to pay off your debts. Instead of making several monthly payments to pay off your debts, you just need to make one monthly payment – that of your debt consolidation loan.
Advantages of a debt consolidation loan
Debt consolidation loans have lower monthly interest rates than other types of loans offered in Canada, so the end result is you are paying less interest so the amount you need to pay is less.
Taking out a debt consolidation loan doesn’t really affect your credit score – as long as you make your monthly payments on time.
Most banks and financial institutions require collateral. They will also look at your credit score and, if you have a bad one they will either deny your loan application or give your one with a high interest rate.
2. Home equity loan
You can either refinance your home or take out another mortgage to pay debts. Home equity is the amount that is left when you subtract what you owe the bank for your house from how much the house is worth.
For example, if your home is worth $500,000 and your mortgage is $350,000, then your equity is $150,000.
You can talk to your bank about taking a second mortgage with your equity and use it to pay your debt. You get a lump sum of money that you can use to pay off your debts and afterwards, you just need to make one monthly payment to your home equity loan.
Advantages of a home equity loan
It is a secured loan as you are using your home as collateral. Secured loans have lower interest rates than other types of loans.
As long as you make your monthly payments, a home equity loan should not affect your credit score.
If you don’t have much equity on your home, this type of loan will not make much of a dent on your consolidated debt.
Applying for a second mortgage will require you to pay fees to your bank.
3. Line of credit
You can get a line of credit from your bank to pay off consolidated debt. With a line of credit, your bank card can be used like a credit card. So, even if you don’t have that money in your account, you can use it to pay your debts.
There will be a predetermined limit to what you can “spend” with a line of credit. For example, $50,000 a month.
Advantages of a line of credit
Lines of credit have a lower interest rate than loans or even credit cards. They are priced according to the Prime interest rate, which is set by the Bank of Canada. The Prime interest rate has been low these past years, so the interest on lines of credit can be as low as 1 to 8%.
There is also a monthly fee that you need to pay with a line of credit so if that is higher than the interest rates on your other loans, it might not be worth it.
4. Low-interest credit card
You can consolidate your debt by paying them off using a low-interest credit card rather than just paying off the monthly credit card bill.
Advantages of a low-interest credit card
It’s all in a name, these credit cards offer low interest rates. So there is a chance that just paying off this credit card will be cheaper than dealing with multiple creditors with multiple different interest rates.
You need to have a good credit score. There are also other fees that could raise your debt, even if your interest rate is low.
5. Debt Management Program
Working with a credit counseling agency, you can negotiate with your creditors for more favorable repayment rates. Credit counselors can often get your creditors to agree to lower interest rates or to drop late fees and penalties. You then make monthly payments to your agency which they will use to pay off your debt.
Advantages of a debt management program
Instead of multiple loan payments with different interest rates, you make one monthly payment to your agency. This makes it easier to remember and budget for.
It will affect your credit score. Even after you’ve repaid everything, the fact you were in a debt management program will show up for six more years.
Your credit counseling agency will charge service fees.