How to Consolidate Your Debts in Canada
If you have a number of debts, you may wish to merge them all into one loan. This is called a debt consolidation loan. There may be a number of reasons why you would wish to do this. Below are the most common reasons:
- Simplify your finances by only having one monthly payment rather than many
- Use the consolidation loan to pay off higher interest debts so that you are left with one loan at a lower interest rate
To learn more about what debt consolidation is and how it works in Canada, click here.
To consolidate all of your debts, your first option would typically be to approach your bank or credit union and see if they can help you.
Add the Debt to Your Mortgage
If you have a mortgage, you might look to see if you have enough equity in your home to consolidate your debt with your mortgage. This is usually people’s preferred option since mortgage interest rates are usually much lower than other loan interest rates, and mortgages can be amortized (paid) over 25 years. This means you can arrange much lower monthly payments than with another type of loan. If you do choose to go this route, you should make sure that you try to pay off this extra mortgage as quickly as possible and don’t do this very often. If you find yourself doing this every year or two, that means that you are spending more than you make, and it is going to take forever to get your mortgage paid off at this rate.
Get a Debt Consolidation Loan
You can see if your bank or credit union is able to provide you with a debt consolidation loan. Banks and credit unions are typically only willing to lend people around 10% of their net worth (your assets minus your debts) on an unsecured basis. So if you ask your bank for a debt consolidation loan of $20,000, but your net worth is only $20,000, they will probably decline your request. They may be able to give you a $2,000 unsecured loan (10% of your net worth), but not much more. When the economy is doing really well and jobs are easy to find, some banks may lend people much larger amounts of money without requiring any security, but this is more of an exception rather than the norm.
So if you approach your bank or credit union for a loan to consolidate your debts, they are most likely to say, “Sure, we would be happy to lend you the money if you have some security for the loan.” If you own a newer vehicle without a loan on it, you could use that as security for your consolidation loan. In this case, a bank would usually lend you up to maximum black book value of your vehicle (the “black book” is a database of very conservative vehicle values. These values will be much less than you could sell your vehicle for in the newspaper or on Craigslist). If you have any other valuable asset like a boat, motorcycle, RV, mobile home, non-RRSP mutual funds or piece of property, your bank may be able to use one of these assets as security as well.
One thing to be careful about with a debt consolidation loan is that many people in Canada try to obtain consolidated credit payments in order to resolve their financial problems and get out of debt. However, if you don't create a monthly spending plan and budget your money, it's very easy to continue relying on credit and get further into debt rather than get out of debt.
See if Family Will Lend You Money
If your bank or credit union can’t help you, then see if maybe a family member or friend is able to lend you the money necessary to consolidate your debts. If your “rich” relative says no, don’t be upset with them. It is everyone’s choice to do with their money as they choose. Maybe your relative’s finances are tight right now—even though they may look successful to you. Lending money to family members involves added risks. If a relative lends you money, but then you lose your job or get hurt and are unable to pay them back, that may sour your relationship with them. If your relative can’t afford to forgive the loan to save their relationship with you, then this could forever cast a shadow over your relationship with them. A wise relative may not wish to put themselves or you in a situation like this. This may be another reason why a relative may not be willing to lend you money. So don’t hold it against them. If a relative is able to lend you money, then make sure that you honour your agreement with them and always make your payments on time as agreed.
If you are not able to obtain a debt consolidation loan, then maybe you can consider other options like selling assets to pay off your debts, downsizing your lifestyle to save money, cutting out expensive hobbies to save money, finding a cheaper home or cheaper place to rent, or increasing your income by taking on another job, taking in ESL students, teaching ESL, or something else. By increasing your income you can pay off your debts faster, and by cutting expenses you can save money to pay off debts faster. If you are able to do both, then you will be able to pay off your debts even more quickly. If you are serious about paying off your debts, there are ways to do it. You may have to be willing to make short term sacrifices for a better life in the long run. You may also have to consider the possibility that you may not be able to afford your current lifestyle. If you want to change your situation, you will have to do some things differently. Be honest with yourself, look at your situation with an open mind and seek the advice of others who you consider to be wise and trustworthy.
Debt Management Program or Orderly Payment of Debts
If none of the above options will work for you, you can speak with a Credit Counsellor to see what other options may be available to you. You may qualify for a debt management program or orderly payment of debts program (depending on your province). These programs help people consolidate all of their credit card payments into one monthly payment and often involve creditors reducing their interest rates to help you get your debts paid off in a reasonable amount of time. These types of programs often provide the added benefit of helping people identify the reasons why their debts got out of hand, and then they help people learn the skills necessary to manage their money well and not repeat their mistakes.
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