We only need to look at the data to understand there has been a dramatic rise in debt over the last few decades. As a result, the average Canadian finds it increasingly challenging to manage their day-to-day spending. And, a debt consolidation loan may be the only way to get these liabilities under control.
Being in debt can feel like wallowing in a bottomless pit. We know how disheartening it is. But, did you know, nearly 73% of Canadians have some type of outstanding debt from the past 12 months?
We’re here to answer all your questions about debt management. We’re also here to help you potentially free yourself from financial stress with a debt consolidation loan. So keep reading to get some real-world advice about managing your financial health.
What is Debt Consolidation Loan?
Debt consolidation is a simple concept. It is using one large loan to pay off multiple smaller loans. The merged debts may include credit cards, outstanding retail balances, lines of credit, and even medical bills.
By combining these debts into a larger but singular loan, borrowers only have one bill to pay each month. This loan is a more straightforward way to manage your debts. It becomes easier to track what payments you need to make, and when.
You may be considering whether bankruptcy or debt consolidation is your best option. And there may be instances where you need to declare bankruptcy first. A financial advisor, attorney, or professional lender can advise you on this. However, these circumstances will be few and far between if your situation is not extreme.
With a debt consolidation loan, you are essentially asking a creditor to loan you one large lump sum of money. Creditors may include reputable institutions like banks and credit unions, and it’s important to only borrow from reputable lenders.
The primary benefit of a consolidation loan is the lower interest rate, which means you can usually pay off your debt with less overall expense.
Factors to Consider with a Debt Consolidation Loan
Once you decide a debt consolidation loan is right for you, you must consider other factors. While consolidation may seem appealing, you need to make intelligent decisions regarding your monthly repayments and the duration of your loan.
Let’s highlight these factors with an example.
Perhaps the bank offers you a five-year loan term. Your required repayment amount drops to $500 per month, including interest and fees. If you were initially paying $1000 per month across various bills, this sounds great!
However, a simple mathematical calculation may or may not further support the case for a consolidation loan.
If you continue paying $1000 to your different creditors, how many months would it take you to get out of debt? Additionally, how much money is going towards paying the principal debt (what you borrowed)? And how much are you paying in interest and fees?
It is very possible that paying down a debt consolidation loan over a longer term will cost you more than paying each debt individually.
Understand Your Financial Priorities
The cost of convenience can be appealing and may suit your needs. The key here is to understand your priorities and short- and long-term goals.
Let’s set up another hypothetical situation, borrowing from the previous one.
If we take that $1000 per month and pay your creditors religiously, you could be debt-free in 24 months. That means you’re paying $24,000 over two years.
The minimum payment on the consolidation loan was $500 a month over five years, which equals $30,000 in total payments.
You’re essentially paying $6,000 more within these initial debt consolidation loan terms. And, most of that extra $6,000 is lender interest and fees.
Potential Savings and Earnings
By spreading out your payments, you have the option of boosting your monthly cash flow. You can channel this into savings and investments if you have long-term saving goals.
It is crucial to understand your own goals and choose what suits you best. If you’re comfortable paying off an additional sum of money for the flexibility that a smaller repayment plan offers, then, by all means, go for it.
If you want to be debt-free sooner, you need to consider the maximum amount you can put into your repayments and still be comfortable.
The best way to make this decision is to compare the monthly payments and cash flow of a potential loan side-by-side with your current situation. After that, based on your objectives, you can determine whether this setup is genuinely right for you, or if you’re making an impulsive compromise.
The Benefits of Debt Consolidation Loans
Before you make any final decisions about whether a debt consolidation loan is right for you, let’s look at some pros and cons.
You can use your existing assets to secure a lower interest rate when working with a lender. For example, if you have a home or land, vehicles or investments, these can all be put forward to demonstrate you’re a reliable borrower.
A debt consolidation loan also protects your credit rating. Because you’re bringing everything under one manageable loan, you’re no longer risking forgetting about debts or running out of money to pay them.
The bank will fully pay all your creditors, meaning you no longer have to worry about being hounded by multiple agencies. In addition, you will only have to make one monthly payment.
However, the most significant benefit is that you will pay less interest overall (depending on the loan term). Paying high-interest rates on a diverse number of debts can turn small loans into overwhelming ones.
As you decide not to spend, record that in a notebook or using a smartphone application like Evernote. This should include the date of the decision, the type of item you were going to buy, and the item’s value. At the end of each week, add up the total of your decisions not to spend.
At the end of the month, add up the weekly totals. You will likely be floored by how much you saved over the month due to not impulse buying according to your normal daily wants.
You can also sign up for a subscription from a service like TrueBill that links your cards and tracks your spending habits daily, weekly, and monthly and compares them with previous results. The great part about TrueBill is that they email you your results on a frequency of your choosing.
We want you to understand that there are three primary downsides to debt consolidation. And, they ultimately depend on how you manage your finances.
Fees can Balloon Quickly
There may be up-front costs when taking out a consolidation loan. Fees may include:
- Balance transfer fees
- Annual fees
- Account closing costs
- Loan origination fees
These can be mediated by asking upfront about all fees you may encounter, including those you may run into for late payments. Paying these fees may be worthwhile for you, but it all comes down to the lender you choose.
Debt Consolidation Loans do not Solve all Your Problems
Second, a debt consolidation loan won’t inherently solve your financial problems on its own.
Merging your debt does not guarantee that you won’t go into debt again. It can certainly help you pay your debts off, but it won’t eliminate the financial concerns or habits that got you there in the first place.
You do not want to have to choose between bankruptcy or debt consolidation at any point in your life. We’ll touch on some things you can do to mitigate the risks of this happening again later.
Finally, missing payments will set you back, not just because of late payment fees. For example, if an amount is returned because of insufficient funds, some lenders will charge you a fee for the returned payment, which impacts your overall repayment plan.
Typically, lenders will also report late payments to the credit bureau after 30 days of non-payment, which can seriously impact your credit score.
These cons don’t have to be detrimental in the slightest. You just need to arm yourself with good information and manage your finances accordingly.
How Can You Obtain a Debt Consolidation Loan?
With a decent credit score and consistent employment and income history, debt consolidation loans are easy to find.
Most lenders appreciate there are advantages to this kind of loan. However, they will also want to see that you have a strong financial management plan going forward.
If you have a bad credit score or a history of living pay cheque-to-pay cheque, you’ll undoubtedly have to explain yourself to your Loan Manager. You will also probably need to adjust your spending patterns. You might even have to completely close some of the credit accounts that the new loan eliminates.
Any reputable lender should assist you in improving your overall financial health and credit score, even if that means being a little tough on you throughout the loan approval process.
Peer-to-Peer Lending as an Alternative Lending Solution
Peer-to-peer (P2P) and other internet lenders are examples of alternative lending solutions. These platforms allow people who have money to lend it to people who need it. However, you should expect to pay a substantially higher Annual Percentage Rate (APR) with these lenders. So, shop around before committing to a loan.
P2P and internet lenders will be more likely to lend to people with less-than-perfect or even bad credit. However, these loans will come with additional interest and fees to mitigate their risk. But, given the circumstances, this may be the best loan option available to you.
Managing Your Finances and Building Better Habits
As previously noted, a debt consolidation loan should not be used as an excuse to re-charge on your other credit cards now that they are paid off.
So, how do you make a long-term shift in your habits?
Begin by assessing each purchase you make. Then, when you’re pulling products from the grocery shelf, think about whether you need them.
Do you need two bags of chips as opposed to one? What about that chocolate bar or ice cream pint? How much do your kids need those three candy bags?
Are fast food oven meals actually cheaper than home-cooked meals?
A proactive, savings-first approach is an excellent place to start when developing and enriching your overall financial habits.
Small Steps Towards New Habits
Small steps now might be what paves the way for future big-ticket purchases. When you take time to critically evaluate every purchase you make, your financial savvy grows stronger and more prominent in your daily life.
This personal financial knowledge will come in handy later in life, especially when you’re deciding which car to buy or whether to take that expensive vacation every year.
A Manageable Example
We all know that you should track what you’re buying and how you’re spending your money. This skill is undoubtedly useful.
However, you should also consider keeping track of what you’re not buying. You can use a physical notebook or an app like Evernote for this. Include the date of your decision, the item you planned to buy, and the value of that item.
At the end of the week, add up the number of your unspent decisions and tally them at the end of the month. You’ll be surprised by how much money you saved by being mindful of your purchases. It is also incredibly gratifying to see how your frugality is paying off.
Needs Versus Wants
The underlying choice always lies between wants and needs.
Needs are the things you require to live. They are non-negotiable. These include food, water, shelter, and utilities. They can also extend to a car and gas if you need to travel to and from work.
Things like weekly social engagements, date nights, and perhaps a beach or lake trip every few months are necessities. We may not consider a date night a need, but relationships and social engagement are a valuable part of our lives.
Becoming a hermit for the sake of saving money is not ideal. Of course, we’re not saying you should go out every night, but make time and account for the cost of keeping yourself and your relationships healthy.
The Things You Want
All of the trivial things we spend on are our wants. But, of course, each person will have a different definition of the word “trivial.” It requires a bit of introspection, but use your discretion and be honest with yourself.
For some, a want might be makeup you’ll only use once or jewellery that gathers dust on your shelf. Replacing a broken tool is necessary, but upgrading a tool that works perfectly fine is a want.
You will be debt-free sooner than you think if you are diligent and restrict your spending.
Prepare for Emergencies
If you find yourself in a situation where you need to use credit cards or lines of credit to deal with an emergency, carefully consider your options first.
Many lenders provide emergency loans for things like repairing your roof or paying medical bills your insurance won’t cover. Some of these lenders even offer a 24-hour approval and funding process, which means you might money in your account the next day.
These specialized loans are usually short-term and have a lower interest rate so you won’t be adding to your high-interest credit card debt.
Managing this debt would be far less challenging than paying off several credit cards.
Debt Consolidation Loans and Taking Charge
The best way to manage your debt is to take control of it. Your first step may be to review and adjust your personal finances and then take out a debt consolidation loan. You should never have to consider bankruptcy as an option to fix your financial situation.
We know how challenging it can be to make these kinds of decisions. And, admitting when you are struggling with debt is the hardest part.
We know you can do this.
We’re here to help you and give you the space and confidence you need to take charge of your debt and live the best life you possibly can. Reach out to us today, and let’s work on your finances together.
Change your spending habits. That is the only way that you’ll fully achieve financial freedom in the future. Nobody wants to spend their entire life under the burden of heavy financial debt. Living like this can affect your mental and physical health, your family, and everyone else around you.
When you’re in debt, it’s important to evaluate every decision you make. Sometimes that is as simple as deciding to stay home on a night that everyone else is going out and saving the money you would have otherwise spent. Instead, go to the gym, go for a walk, enjoy nature, get some fresh air, or even just watch a movie on the couch. You will feel better the next morning because (a) you probably saved a lot of money, and (b) you might have missed the hangover that everyone else has the next day!
These simple decisions make the biggest difference when you look at what you spend at the end of every month. You will be very surprised by how much you save if you start moderating your own behaviours and take a conscious step forward in resolving your debts. Yes, a debt consolidation loan can help you immediately solve the complicated process of managing and paying your monthly bills. But, if you end up with the same debt as before plus the debt consolidation loan, what was the point?
You really shouldn’t have more than two open credit cards at any time. If you prefer American Express, get a low-limit charge card or one of their air miles cards. Given that a lot of places don’t take Amex, get a Visa or MasterCard as well. Again, a card with cash rewards or travel rewards is preferable, so you can earn for every dollar you spend. Stay away from retail credit and charge cards if at all possible. They carry very high interest rates.