Multiple payments, different interest rates, random due dates—debt creates a lot of confusion. And, if you forget a due date and miss a payment, your credit score can falter. Sometimes, we just need things a little simpler.
With your ease in mind, consider debt consolidation. A debt consolidation loan means you take out a big loan to pay off your smaller loans.
But if you’re thinking, “I need a big loan to pay off debt, but I don’t know where to get one,” then this article is for you. Read on to learn your best options for getting a big loan to pay off debt in Canada, from debt consolidation loans to bill consolidation loans and lines of credit.
What is Debt Consolidation?
Debt consolidation is a debt strategy where you combine multiple debts into a single loan. One of the main benefits of debt consolidation is it simplifies debt repayment. Instead of multiple debts to keep track of, you create one monthly payment at a set interest rate. There are several ways to consolidate your debt, such as with a personal loan or line of credit.
Can I Use a Personal Loan For Debt Consolidation?
Yes, you can. With a personal loan, you borrow a fixed sum of money with a fixed interest rate. You then pay it back with monthly payments over a predetermined period of time.
Personal loans for debt provide a lot of flexibility. You can use them to renovate your home, buy a car, or consolidate your high-interest debt. Another advantage of personal loans is their predictability. Since you have a fixed interest rate, you know exactly how much to budget for each month.
A personal loan is an ideal vehicle for debt consolidation (if you can qualify for a big enough loan) as it rolls all outstanding payments into an interest rate lower than you currently pay.
Can I Use a Line of Credit For Debt Consolidation?
Yes, you can also use a line of credit to simplify your debt payments. With a line of credit, you borrow up to a pre-set amount. It functions like a credit card, where you use the money as you need it and only pay interest on the amount used.
Many lines of credit come with variable interest rates. Which means the rate you pay can go up and down based on monetary policy by the Bank of Canada. This can make it harder to budget for your monthly payments.
A benefit of a line of credit is you can often find a lower interest rate than with a personal loan or credit card. However, with a variable rate, it could rise over time.
How to qualify for a personal loan or line of credit
When you apply for a personal loan or line of credit, prepare to show these common loan requirements:
- Statement of income: Most lenders want to confirm that you have a consistent monthly income to ensure you can repay your loan.
- Debt-to-income ratio. Your debt-to-income (DTI) ratio describes the percent of your monthly income that goes to debt repayment. The higher the number, the riskier you are to lenders. A lower DTI can help you get more favourable loan terms.
- Credit score. Most lenders will run a hard credit check to review your credit score and credit report. This helps them determine if they want to lend you money (a loan with no credit check is rare) On average, lenders consider a credit score of 660 or higher as low risk.
Lenders will use this information to determine if you qualify and the interest rate you’ll pay on a personal loan or line of credit.
What Debts Can I Consolidate With a Personal Loan or Line of Credit?
You can use a debt consolidation loan or line of credit to pay off the following debts:
- Credit card debt
- Bills
- Overdraft accounts
- High-interest loans (payday loans)
Can Consolidation Help Me Get Out of Debt Faster?
Debt consolidation can help you get out of debt faster if you can:
- Qualify for a loan with an interest rate lower than the high-interest loans you want to consolidate.
- Lower your monthly payments so you can use the extra money to pay your debts off faster.
- Find a loan or line of credit large enough to cover your smaller debts.
- Stick to a budget and reduce new debts.
Alternative Debt Solutions
If you have bad credit and can’t qualify for a bill consolidation loan or line of credit, there are other options to choose from.
Balance transfer credit card
A balance transfer credit card shifts high-interest debt to other cards with lower rates. Similar to a personal loan, you need to qualify for a card with a limit large enough to cover your other debts. Ideally, you want to find a balance transfer credit card with a 0% introductory Annual Percentage Rate (APR). With this card, you have a certain period of time where you pay no interest on your balance. You can save money on interest if you can pay off all or most of your debt before the intro period ends.
Debt management program
In a debt management program (DMP), a credit counsellor makes an offer to your creditors on your behalf. The goal is to consolidate your debts into one monthly payment. Most of the time you have to pay back all of your debt, but your counsellor will ask your creditors to reduce or eliminate your interest payments and fees or extend the time you have to repay your debt. This is a voluntary process—your creditors don’t need to participate.
Consumer Proposal
In a Consumer Proposal, you work with a Licensed Insolvency Trustee (LIT) to create a repayment offer with your creditors. The new offer can request changes, where you pay a percentage of your debt, extend the time of repayment, or both. This is a formal legal process administered solely by a LIT. Unlike a DMP, a Proposal can reduce the total debt amount you must repay. Once you meet the terms of your proposal, you’re legally released from your debt.
Bankruptcy
Bankruptcy is a legal process designed to give Canadian debtors a second financial chance. In Bankruptcy, you’re discharged from many of your unsecured debts. In exchange, your LIT will sell many of your assets to pay back your creditors. A LIT is the only professional in Canada who can administer a Bankruptcy or Consumer Proposal.
Help! I Need a Big Loan to Pay Off Debt
If your monthly payments are getting out of control and you need help managing your debt, speak to a Licensed Insolvency Trustee at Allan Marshall & Associates. A LIT can assess your debt situation and help you determine if debt consolidation is a good choice or if you need a more formal strategy like a Consumer Proposal or Bankruptcy. For a free, no-obligation consultation, give us a call at 1-888-371-8900 or book an appointment online.
