Making Debt Consolidation Work for You
Date: February 15, 2023
Financial debt is something many of us have experience with, be it credit card debt, mortgage payments, or student loans. For most of us, it is a part of life we can manage reasonably well – especially with the help of a financial advisor. Sometimes, however, debt can become overwhelming, and if you find yourself in untenable debt, you’re not alone. In fact, the average Canadian’s monthly credit card debt increased by 17.3 per cent between 2021 and 2022. The Canadian credit bureau reported that the average consumer debt load in 2022 – excluding mortgages – was $21,183. While this is certainly not promising, it’s also not entirely surprising, with COVID-19 and the resulting inflation taking a toll on all our financial situations since 2020.
So, if you’re in a position where you’re looking for alternative options for managing your debt, consolidation may be the right option for you in order to set yourself up for a successful financial future.
What is debt consolidation?
Debt consolidation is essentially what it sounds like – rolling two or more debts into one for a single monthly payment. Sometimes it’s not just the stress of multiple interest rates to contend with that becomes overwhelming, but the multiple payments themselves to keep track of. With debt consolidation, the bonus is that you have only one payment to make each month. Additionally, you may be able to secure an interest rate on that loan that is lower than the rates of your previous debts. Because of this, you are often able to repay your debt faster.
“The best way to be sure you’re making the right choice is to speak with your financial advisor.”
Is debt consolidation right for you?
“Everyone has a different financial situation, and each of us has different levels of comfort when it comes to the financial choices we’re willing to make,” explains Virginia Mathison, Assistant Branch Manager at Westoba. “There are a number of options available to you if you’re considering debt consolidation, which will be informed by the type of debt you’re carrying, your credit score, and whether or not you have real estate assets.” However, it’s also important to be mindful of the possible downsides to debt consolidation before you make any decisions.
Be aware that, depending on your credit score, your debt consolidation loan could come with a higher interest rate than what you’re currently paying. It’s also important to know that there may be upfront costs if you choose to consolidate your debt, like balance transfer fees or annual fees. Finally, it’s crucial that you make your payments on time every month, as missing a payment will set you back even further. While debt consolidation can help relieve the stress and overwhelm of multiple debts, it will not help solve your financial troubles unless you can change your spending patterns to avoid finding yourself again in debt down the road.
There are also different types of debt – secured and unsecured – and varied risks are associated with each.
Secured vs. Unsecured debt
Secured debt is that which is associated with a specific tangible asset, like a home, a cottage, or a car. This kind of debt is called “secured” because lenders can place a lien on that asset and seize it should you fail to repay it. A mortgage is an example of a secured debt because your mortgage lender has the right to seize your asset – your home – if you fail to make mortgage payments. This helps to mitigate their risk.
Unsecured debt, as you might guess, is debt that is not associated with a specific material asset, which means that lenders do not have any assets to seize should you fail to make payments. A student loan is an example of unsecured debt. However, lenders still have the option to hire a collection agency or pursue legal action to encourage you to pay the debt should you fail to make payments.
How do you know if debt consolidation is right for you? If you have a good credit score (which is usually considered 660 or higher), you will have a better chance of securing a lower interest rate on a new loan. If you’re happy with a fixed monthly payment and can afford to repay the new loan, then debt consolidation is likely a good choice for you. However, the best way to be sure you’re making the right choice is to speak with your financial advisor says Virginia. “If you don’t have one, you can meet with one of our experienced and knowledgeable advisors to explore your options and find a solution that best meets your needs.”
What types of debt consolidation can you consider?
There are three options to consider when it comes to debt consolidation, and each could be right for you depending on your debt, situation, and financial goals.
Debt consolidation loan
Combining all your debts – such as car loans, personal loans, student loans, and credit card debt – into one loan is an option for debt relief that can help make debt repayment smoother and easier on you. When you apply for a debt consolidation loan, your lender will perform a check on your credit score. Once you are approved for the loan, it is deposited into your bank account to repay your debts. Any unpaid interest on those debts is included in the principal balance of the consolidation loan. Then you simply make the monthly payments on that consolidation loan.
Credit card balance transfer
A credit card balance transfer is a good option if you want to move your balance from one credit card to another with a lower monthly interest rate. Some credit card companies will offer an interest-free introductory period (often six to eighteen months) and waive any balance transfer fees, although this isn’t always the case. The important thing to remember with a credit card balance transfer is that you must continue making your monthly payments to avoid nullifying any interest-free periods or incurring a higher interest rate.
Check out Westoba’s Collabria Credit Card offers here.
Home equity loan
A home equity loan – often referred to as a second mortgage – allows you to borrow money against the equity in your home. This means that you are using your home as collateral for the loan, which you’d then use to repay your debts. The difference between your home’s current value and the amount owing on your initial mortgage will inform the loan amount you will be approved for. There are different types of home equity loans: one is a fixed-rate loan, which provides you with a lump sum to repay your debts; another is a home equity line of credit, which provides you with a variable-rate source of funds to make use of as you choose.
As with any major financial decision, it’s important to ensure that you understand all your options so you’re able to choose a path forward that suits your lifestyle and goals. Get in touch with our Financial Advisors today, and we would be happy to help you explore debt consolidation options to get you on the right path toward financial success.
