Debt consolidation is one of the best financial solutions for people who have a lot of debt and have issues with debt payment. It is a means to manage paying debt and saving some money on interest. There is no doubt that converting several small loans from different creditors into a single loan is much less stressful and more straightforward; however, not all debt consolidation options are the same.
Some debt consolidation methods have longer repayment terms that mean you end up paying more in interest over time. Some have very flexible terms that may tempt the borrower to put off repaying until debt becomes an issue again. So, what are the best debt consolidation methods and what are their pros and cons? Financial experts CFO and co-founder of Money Coaches Canada Sheila Walkington and head of Credit Counselling Society in B.C. Scott Hannah talked about them in an interview with Global News.
Personal loans or term loans have a near-future end date, generally predictable yet mandatory monthly payments, and often fixed interest rate, making them the easiest debt consolidation method to manage for those who can qualify for it. However, because their repayment scheme is often shorter than a HELOC or some other types of loans, the monthly payments are significantly higher and may not be the best option for someone who is financially struggling. There is no prepayment penalty, though, so if you’re expecting a windfall in the near future, this debt consolidation option may work out for you.
Unsecured Lines of Credit
Unsecured lines of credit come with relatively low interest rates these days, with some charging just 5% to 8% interest. They also come with flexible payment terms, in which you can pay as much as you want or as low as just the interest per month, enabling you to adjust payments with your cash flow. The downside is that the flexible terms can put you deeper in debt if you don’t watch yourself closely enough.
A HELOC is one of the debt consolidation methods with the lowest interest rates, with some lenders charging as low as 4.5%. Your home equity is used as collateral for your credit limit so it can help you pay bid debts. Because it is secured by your home, the obvious downside is you risk losing your home if you are unable to pay but if your credit score is not as desirable as what banks require, a HELOC may be a great debt consolidation option for you.
Consolidating your high-interest debts into a mortgage may allow you to save a lot on interest because mortgage interest rates can go as low as 3.39% according to Ratehub.ca. Monthly payments are generally low and interest rate is fixed so you won’t have surprises down the road; however, the payment terms are generally longer and you’ll have to pay a pre-payment penalty fee should you be able to pay it off earlier than agreed.
A second mortgage for debt consolidation means taking a new home loan on a house that is already mortgaged. Because the lender faces more risks with this type of home loan, the interest rate is generally higher with a second mortgage; however, it is still a smart debt consolidation method because you will still end up saving a lot of money on interest as compared to having a few high-interest debts. After all, one loan is a lot easier to manage than dealing with multiple bills per month.