How To Consolidate My Debts

How to Consolidate my debt
Article Overview

When you have multiple debts, such as mortgages, lines of credit, car loans, student loans, credit card debts etc., it may come to a point where it is difficult for you to track every single one of them, let alone coming up with a strategy to pay them off on time. What you can do is consolidating your debt, meaning putting all your debts together to one source to help you manage them better. You might be wondering how to do that, this article will answer many of your questions on debt consolidation.

How To Consolidate My Debts

Consolidation of debts can be used by people who have more than one creditor. Consolidating your debts simply means merging them into one and paying them off as one debt. This will help you simplify your finances by having just one monthly payment instead of having multiple payments. To achieve this, you will need to approach your creditors and discuss a debt consolidation option.

Ways To Consolidate Your Debt

If you have a high debt profile, it will be good for you to consolidate your debt into one to make it easier and faster to pay off. It doesn’t matter if the debts are different or not from the same creditor, there are ways to go about consolidating them. If you have a stack of credit card debts with high-interest rates, school loans, car loans, and high-interest loans, all of these can be consolidated into one debt with are negotiated interest rate. You can manage your debts, pay less in interest and minimize your monthly payment while you ultimately eliminate all your debts. Below are some of the ways you can consolidate your debts.  

1. Get a Debt Consolidation Loan

Some banks, credit unions and other financial institutions offer debt consolidation loan options. You can check with your bank to know if this is possible. When you approach any of these institutions, the consolidation loan they grant you may be a secured or unsecured loan.For an unsecured loan, most banks and credit unions are only willing to lend you around 10% of your net worth which is your total assets minus your total debts. So for example, if you request a consolidation loan of $10,000 but you have a net worth of $10,000,your creditor may only be willing to offer you a consolidation loan of $1,000,which is only 10% of your net worth. Depending on the circumstances of the economy, some creditors may be willing to give you more but it is usually on rare occasions.

For secured loans, what will determine how much consolidation loan you get is the value of your collateral. This means that the creditor may lend you the maximum money to the tune of the value of your asset. So if you have a brand new car without a loan on it or you just bought a house without a mortgage on it, then the creditor may lend you up to the tune of the value of the asset as a debt consolidation loan. You can always combine assets and use as security for the loan.

One important thing to note about a debt consolidation loan is that you should have a monthly spending budget so as to avoid getting into further debt while trying to settle an existing debt.

2. Credit Card Balance Transfer

Credit card accounts are known to offer attractive promotions that you can maximize to consolidate your debt. This is usually suitable for credit card debts. You can pay off your credit card debts with a new credit card. This also amounts to consolidating your credit card debts. The catch with this is that if you are able to do a credit card balance transfer into your new credit card, if you are lucky, with a low-interest rate, this new interest rate will not apply to any new purchases you make off the credit card. Also, this low-interest rate is usually for a promotional period. Therefore, if you are not able to complete your debt payment before the end of the promotion, you may be stuck with the normal credit card interest rate. If you are sure that you will be able to make the total repayment on time before the end of the promotional offer for a low-interest rate, a credit card balance transfer is a good way to consolidate your debt.

3. Home Equity Line Of Credit

First, to define home equity, it is when you subtract what you owe on your house from its total value. The common misconception is that home equity is the amount of money you have paid off from the value of the property. Your home equity can also be used to settle your debt situation. Depending on how much equity you have in your home, you can borrow against it and use the money you get from it to pay off your debts. The mortgage rules of each province vary. Make sure you know what applies in your province. However, before you increase your mortgage in order to consolidate it with your debts, you can take out a second mortgage at a higher interest rate or you can apply for a home equity loan.The advantage of exploring the home equity line of credit to consolidate your debts is that mortgages offer a lower interest rate compared to other loan interest rates. Mortgages can also be amortized over a long period, some as long as 25 years.

4. Refine Your Debt Payment Strategy

This can be used to support your debt consolidation. Once you have been able to consolidate your debt payments, if they are still in more than one payment, you may have to prioritize which of the debts you can afford to pay first. You can use any of these strategies:Pay off the smaller loans first– This will enable you to reduce your overall debt load. The smaller loans are usually easy to clear and clearing them will also give you a sense of accomplishment of some progress and initial success.

Pay off the ones with the highest interest rates first – This is another strategy you can use. It is advisable to tackle the loans with higher interest rates first and get them off your neck. This is because when debts with higher interest rates accumulate, it makes it difficult to finish paying off a loan. However, debts with higher interest rates are usually the largest debts. Therefore, before you can use this strategy, you must ensure that you can pay off the debts as soon as possible so that they will not be a burden in the long run.

5. Discuss With Your Creditors

Most debtors are scared of discussing with their creditors. However, this maybe a solution for you. One thing that should encourage you to speak to your creditors is that it is in their best interest to help you find a way to payoff your debt as early as possible. If you are struggling to make the minimum payments on your debts (line of credit or credit card debts), you can always try the option of talking to your creditors. Creditors in Canada usually have programs that can grant you a payment break or lower your minimum payment. Ensure that you fully understand the financial implication of whatever agreement you reach with your creditors.‍

6. Speak To Your Family Members

After exploring other options and you are not able to make any headway, talking to friends and family is an option you can consider. Friends and family may be able to rally round to raise the money you need to pay your consolidated debts. However, don’t go asking with an entitlement attitude as everyone has their financial obligations. Besides, loaning money to a family member has its risk because anything can happen such as the family member losing his/her job and making it difficult to pay back. This may not encourage your family members to loan you the money you need. If you are lucky to get a friend or family member that will loan you money to pay off your debts, ensure that you honour your agreements with them.

7. Talk To a Financial Expert

Speaking to a financial expert can go a long way in giving you a clearer picture of the options you have in consolidating your loan. A reputable financial expert will explain all the options available and give you and tell you the financial implication of each decision. In Canada, the first meeting with a financial expert is usually confidential, objective and free.‍Financial experts also know about debt management and orderly payment of debt programs that can help you inthe consolidation of your debts. These programs vary between provinces and theywill help you consolidate your debts into one monthly payment or creditreducing interest rates in order to enable you to pay your debts faster. Whenhearing about these programs from financial experts will improve yourunderstanding of how to manage your money and avoid putting yourself in thiskindof situation again.

8. Other Options

If you have tried the various options above but to know success, you can also try some other options to help you pay off your debts. You may consider selling off some of your assets like your car, vacation home, boat, etc. the money you make from the sale can be used to service your debts. You can also consider downsizing your lifestyle in order to save money and have the extra cash you can divert into paying off your debts. No more window shopping, eating out and luxury items. You can also take extra jobs and gigs that will give you extra cash you can use in paying for your debts. Increasing your income will go along way.

FAQ

Consolidating all of your debts into one payment entails obtaining a new loan to pay off multiple debts, leaving you with only one monthly payment.

Consolidating debt can hurt your credit score if you miss payments on the new loan or if you close credit accounts after paying them off. However, if you make on-time payments and keep credit accounts open, your score can actually improve.

A good way to consolidate debt is by shopping around for the best interest rates and loan terms, and selecting a loan that fits your budget and financial goals. Consider personal loans, home equity loans, or balance transfer credit cards.

The best way to consolidate and pay off debt is to create a budget, eliminate unnecessary expenses, and apply any extra funds to debt repayment. Consolidate debt with high interest rates into a loan with a lower interest rate and make regular payments on time. If necessary, seek the assistance of a financial advisor or credit counsellor.

Article Overview

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Written by:

Jim Pan, CFP, MFA-P

Jim is a dedicated, fee and advice only independent Certified Financial Planner with a focus on supporting healthcare business owners during their crucial growth phase. His expertise lies in offering comprehensive solutions to minimize taxes while embracing a holistic approach. With a career spanning back to 2010, Jim has established a strong presence in the financial industry. He proudly holds a range of designations, including Certified Financial Planner (CFP), and Master Financial Advisor - Philanthropy (MFA-P). He is currently pursuing additional designations and qualifications to better serve his clients and community. Beyond his qualifications, Jim is a member and an esteemed participant in the Million Dollar Round Table (MDRT), an exclusive global association comprising the top 1% of financial advisors. Jim's commitment extends to the community, where he spearheads numerous charitable fundraising events and plays an active role in enhancing the well-being of others. Additionally, he has contributed significantly by serving on the board of the Canadian Mental Health Association in Vancouver. Currently, he volunteers with Junior Achievement of British Columbia (JABC) to present personal finance topics to youths.

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