If you have accumulated a number of different debts, such as multiple credit cards, or a student loan, or medical debt, in addition to a mortgage, you may want to consider consolidating all of them into one loan. The purpose of this is to simplify your life, with one monthly debt payment to consider, and you can also benefit from a lower interest rate, as consolidation loans often carry less interest than consumer debt does. This article provides information about different options that you have to bring your debt payments down to one — and cut your interest expense as well.
Refinance to Pay off Debts or Consolidate
One option that you have is to add the debt to your existing mortgage. If you’ve been paying on your mortgage for several years now, and your down payment was large enough, you might have enough equity to be able to take it out and add that debt to your current mortgage. The interest rates on a mortgage are generally going to be lower than other forms of debt, and you can amortize most mortgages in Canada for as long as 25 years. Whether you do this or take out a second mortgage, it’s good to know that interest rates in Canada are at historic lows, available between three and six percent.
You could also apply for a debt consolidation loan. Many banks or credit unions offer this, although some will only lend as much as a fraction of a person’s net worth, which would be their assets less their debts. They may go higher than that if you can offer some security, such as the title to a newer vehicle, in which case they may lend you as much as the “black book” value of your car. However, “black book” is a conservative valuation — much less than what you will usually find as the resale value. Other assets, such as boats, motorcycles, vacation homes, vacant land or mutual funds not part of your RRSP account, can also serve as security, depending on the lender’s policies. The key if you choose this option, though, is to stay strictly within a budget and not continue to add to your consumer debt at the same time.
Another option is to ask family members or friends for a loan. You do run the risk of altering the relationship that you have with that relative or friend. If that person says No, then you need to tell yourself that the person is just trying either to keep a healthy boundary or is going through some financial issues. Also, if they give you the loan, you have to treat it just as seriously as if you were borrowing from a bank. Draw up an agreement and keep to your agreed payment dates.
A finance company, subprime or private lender could also help. In this case, though, the interest rates could climb as high as 15 or even 30 percent — which would mean that you’re getting close to consumer debt rates. With the loan origination fees, you might not be saving much money here, so take a close look at the deal. In some the cases the increase in the cash flow and the single payment is all a person needs to bridge the gap from a tough situation to a better one.
Still looking for options? You can also thinking about other ways to alter your budget. Do you have assets that you don’t use anymore? Do you have a garage full of older electronics, sporting goods and the like? You could turn that into several hundred dollars if not more. Do you have some pricey hobbies that you could cut out? Do you have some lifestyle choices that you don’t need to keep doing? Could you add another job? Those questions could lead to some decisions that end up saving you a lot money over time. Even if it means a short-term series of sacrifices, the long-term benefits could be significant.
There are some programs that offer debt management or orderly payment of debts arrangements, depending on the province where you live. This also allows you to consolidate credit card payments into one payment and ask creditors to reduce the interest rates. These programs also include credit counseling so that borrowers understand money management skills and don’t end up in the same situation.