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Debt Consolidation

Debt consolidation is the practice of combining your higher interest debts into one loan with a lower interest rate. This saves you money and simplifies your repayment structure and process. Debt consolidation can help you lower your monthly debt repayments, lower the interest rate on your debt amount, and as you pay down your debt total it can help improve your credit score.

There are various methods for debt consolidation but if you have a home there are some ways that can be worthwhile to explore. These include second mortgage options like a home equity loan or a home equity line of credit, and the option of a mortgage refinance. Because these are secured loans they will have a lower rate than your unsecured debts making them great options for debt consolidation.

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    Advantages of Debt Consolidation

    If you are in a situation where you have various debts with high interest rates or a difficult payment schedule you should consider debt consolidation. Paying off multiple different debts at a time can be a burden on your finances and wellbeing. Credit cards and various other unsecured loans have high interest rates and it can be difficult to juggle repayments. By combining, or consolidating, your debts with a secured loan or financial tool you can simplify your payments and make your debt burden more manageable while having a much lower interest rate on the loan. There are many advantages to debt consolidation, including:

     
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    Risks Involved

    Debt consolidation can be a very beneficial process to help you out of your debt situation, however there are some risks one should be aware of. When applying for a loan you generally need a favourable credit score, generally in the mid-600s, to be eligible for a suitable loan that has a low interest rate and an amount suitable for debt consolidation. If the interest rate on your new loan is higher than your existing debt then it is not a suitable choice. Debt consolidation requires financial discipline. If you improperly use your new loan or continue to accrue high interest debts on your credit cards you run the risk of increasing your debt. Similarly, the process of paying down your debts can take many years depending on your total amounts and requires long-term discipline. If you choose to go with a second mortgage or mortgage refinance for your debt consolidation you need to be aware of the associated costs and fees. Your lender or broker may charge you fees for processing new loans or for changing your existing agreements. If the fees and costs exceed the savings you would make then it is not suitable to proceed.
     

    Credit (HELOC)

    A home equity line of credit, or HELOC, is an excellent tool for debt consolidation. It is a second mortgage that provides a line of credit, allowing you to access the built up equity you have in your home. You can use or borrow from the HELOC on demand and then pay it back over time, similar to how a credit card works. Because a home equity line of credit is secured against your property it has a lower rate than unsecured loans and debts. Debt consolidation requires the combining of your debts into one package, so you can pay off your existing debts using your home equity line of credit which combines the amount into one place. You then take advantage of the lower interest rate and the simplified payment structure to pay off your debt.
     
    Home equity line of credit HELOC documents.

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    Tips for Getting a Debt Consolidation

    Because the burden to prove eligibility is greater on self-employed individuals, it pays to be well prepared before applying for a loan. The following should be considered before going into apply for a Self-Employed Mortgage:

    A home equity loan is another type of second mortgage that can be used for debt consolidation. It provides you with a lump sum of money that can be used and is paid back in installments with interest. It is similar to a HELOC but different in that you get the whole sum as a loan instead of as a line of credit.

    A mortgage refinance is when you have an existing mortgage agreement that you break to start a new mortgage agreement. For the purposes of debt consolidation you would combine your remaining mortgage and your debts into a new amount for your new mortgage term. There may be fees and penalties associated with a refinance that can exceed the possible savings so it is important to assess all the factors before you make your decision.

    There are other methods and tools that you can use for debt consolidation but they may not be as advantageous. They can include:

    • Personal Line of Credit or Debt Consolidation Loan: These are unsecured loans so while they may have lower interest rates than credit cards they will have higher rates than secured loans like second mortgages. They may be better used for debt consolidation of smaller amounts.
    • Debt Management Plans: Debt management plans are provided by credit counseling organizations that help you with debt consolidation. They send a proposal to your creditors to group all your credit card payments into one monthly payment. Your creditors have to agree with the proposal but they can be a useful tool to explore.

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    Commonly Asked Questions

    A private mortgage is a type of loan that is provided by private lenders instead of traditional lenders. They can be a great option for those who are self-employed or have an irregular income, a bad credit score, or have a non-traditional property.
     

    When you apply for a private mortgage with a private lender you are evaluated based on your property, your income, and any down payment or equity that may be involved in the deal. If you qualify for approval you proceed to negotiating mortgage terms with the lender.

    Private lenders typically charge a 8-20% interest rate. By providing a private mortgage for those with poor credit, unstable income, or without a long credit history, the lender is taking on a greater risk so the interest rates are accordingly higher than a traditional mortgage.

    Private mortgage lenders will secure their loan through your property so while they are considered higher risk than a traditional mortgage they will be less risky than an unsecured loan. It is important to understand the structure, terms, and conditions of your private mortgage when you sign on.