Debt Consolidation

Debt Consolidation

We only need to look at the data to understand that 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.

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 had some 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 with a debt consolidation loan. So keep reading to get some real-world advice about managing your financial health.

DEBT Consolidation

What is Debt Consolidation?

Debt consolidation is a simple concept. It involves using one large loan to pay off multiple unsecured 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 to pay one bill 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 or 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

Once you decide that a debt consolidation loan is right for you, you must consider other factors. While consolidation may seem lucrative, you still need to make intelligent decisions regarding your monthly repayments and the duration of your loan. 

Let’s set up a potential situation to highlight what we mean.

Perhaps the bank offers you a loan term of five years. Your repayment scheme has dropped to $500 per month, including interest and fees. If you were initially paying $1000 per month across various channels, 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 into different avenues, how many months would it take you to get out of debt? Additionally, how much money is going towards paying the bulk of debt? And how much is interest?

Understand Your 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 with the initial stipulation of the loan. However, keep in mind that 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. 

We’re saying here that 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 illustrate the monthly payments and cash flow of a loan right next to 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

Before you make any final decisions about whether debt consolidation is the right plan for you, let’s look at some pros and cons.

The Pros

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 explain why you’re a reliable borrower.

A consolidation loan also protects your credit rating. Because you’re bringing everything into one manageable location, you’re no longer risking forgetting about debt or running out of money to pay it. 

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. Paying high-interest rates on a diverse number of debts can turn small loans into overwhelming ones. 

Budgeting and Planning Debt Repayment is Important

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 the application emails your results to you on a frequency of your choosing.

The Cons

We want you to understand that there are three primary downsides to debt consolidation, but they ultimately fall on how you manage your finances. 

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 Does not Solve all Your Problems

Second, debt consolidation 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.

Late Payments

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 scheme.

Typically, lenders will also report late payments to the credit bureau after 30 days of non-payment, which can seriously impact your credit score

The cons don’t have to be detrimental in the slightest as long as you ensure you’re managing your finances conscientiously and arming yourself with good information.

How Can You Obtain a Debt Consolidation Loan?

If you have a good credit score, a low amount of credit queries on your account, and consistent employment and income history, consolidation loans are often straightforward to get. We’ve also got some additional debt consolidation tips for you.

Most lenders, including your bank, appreciate that there are advantages to this kind of loan, provided they can see that your financial management is consistent.

If you have a bad credit score or a history of living paycheque to paycheque, you’ll undoubtedly have to explain yourself to the Loan Manager. In addition, you’ll probably need to adjust your spending patterns. You might even have to completely close some of the credit accounts that the new loan will eliminate.

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 low credit. However, these will come with additional interest and fees to mitigate their risk. But, given the circumstances, this may be the best debt consolidation loan Canada has to offer you.

Managing Your Finance and Building Better Habits

As previously said, a debt consolidation loan should not be used as an excuse to re-charge your other credit cards now that they have been 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 very well be what paves the way for future big-ticket purchases. When you take the time to critically evaluate every purchase you make, your financial savvy only grows stronger and more prominent.

This personal financial knowledge will come in handy later in life, especially when you’re deciding which car to buy or even whether to take that lavish vacation every year.

A Manageable Example

We all know that you should track what you’re buying and how you’re spending your money, and this 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 sort of thing 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 an incredibly gratifying approach to take when you can 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’re non-negotiable. These include food, water, shelter, and utilities but can 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 money on are wants. But, of course, each person will have a different understanding of the word “trivial.” It requires a bit of introspection, but use your discretion and be honest with yourself.

For some people, a want could be makeup you’ll only use once or jewellery that only clutters your shelves. Of course, 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 expenditures.

Prepare for Emergencies

If you find yourself in a situation where you need to use your credit cards and 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 expenditures that your insurance won’t cover. Some of these lenders even offer a 24-hour approval process, which means you might have money in your account the next day.

These specialized loans are usually short-term and have a lower interest rate so that 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.

Taking Charge of Your Debt

The best way to manage your debt is to take control of it, whether that means taking the first steps to get a debt consolidation loan or changing your core spending habits. You should not have to choose between bankruptcy and debt consolidation.

We know how challenging it can be to make these kinds of decisions, and admitting when you are struggling with your 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. So reach out to us today, and let’s work on your finances together.

Credit Tips!

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: (i) you probably saved a lot of money, and (ii) 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. Again, 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.

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