If you find yourself in debt from credit cards, back taxes, business loans, and/or car loans it can become difficult to manage and pay down, not to mention just downright depressing.
How does debt consolidation work?
To consolidate your debt, you essentially take out another loan at a lower interest rate. The funds from this loan are then used to pay off your other loans. This makes your payment process easier and, more importantly, lowers the interest rates you pay and your monthly payments.
It is important to keep in mind that you are not going into debt to get out of debt. You are simply transferring debt. This will lower the number of loans you have and help you reduce your debt more quickly.
Know your options
There are many ways to consolidate your debt, each of which, has its own pros and cons:
- Consolidate your debt using a debt consolidation loan: These types of loans are typically 6-12-month term, interest only loans. Interest rates will be higher than a typical mortgage, but substantially lower than credit card interest rates.
- Consolidate your debt using a home equity loan: This is similar to a debt consolidation loan. A home equity loan is simply a short-term second mortgage loan that is designed to lower your interest rate and improve your credit rating. This then allows you to roll the debt back into a traditional mortgage at an even lower rate
- Use a home equity line of credit: Home equity lines of credit (HELOCs) will have higher interest rates than a mortgage, but, will have fewer restrictions on when you can pay it off. It also allows you to draw from the line of credit whenever you like unlike a traditional mortgage or a home equity loan, which are lump sum loans you take out all at once.
- Refinance your mortgage or take out a second mortgage: This will get you the lowest interest rate of any debt consolidation option. We will always try to put you into this option first as it will clear up your debt quickly, improve your credit rating and provide you with one simple payment – your mortgage.
Is debt consolidation right for you?
If you are a homeowner, then debt consolidation will allow you to draw down some of your equity, which will help you get a lower interest rate. Remember, you need to make sure that you are moving your debt into a lower interest rate and that the difference is sufficient enough to make it worth your while.
A debt consolidation case study:
Client: Jasmine Bautista
Mortgage broker: Eli Salazar
Previous mortgage and liabilities = $345,103
Previous payments = $3,434.87
New mortgage = $380,000
New payment = $1,647.19
Total monthly savings = $1,787.68
Jasmine came to our team completely stressed because of her bills and debts. She was working two jobs to stay afloat which was putting a tremendous strain on her family life, constantly missing out on time to spend with her three children. Through a debt-consolidation process using her home equity, we were able to consolidate all her debt into one mortgage payment, lowering the interest she pays on to service the debt and provide her substantial monthly savings. Jasmine was able to quit her second job and now is able to spend more time with her children. Her quality of life has improved greatly. Not only did Jasmine save time and money, she was also able to use the extra savings to replenish her RRSPs and RESPs and start a savings program too.
Debt consolidation can be an excellent way to lower the interest you pay on your debt, improve your credit, and get out of debt sooner. Like everything in life, it requires thoughtful deliberation, dedication and work on your part. We’ll guide you on the path and be with you every step of the way until you too can do the debt-free dance!