How to consolidate debt

Managing multiple types of debt can be overwhelming and stressful. Debt mergers can help you simplify it by combining two or more debts into monthly payments.

You have many options to consolidate debt in Canada and we will explore below. The best option depends on the type of debt you have: secured or unsecured.

• Secured Debt: This is when you borrow money against assets such as a house or vehicle. The asset is collateral for the loan, which means that if you default on the debt payment, the lender has legal requirements for the asset.
• Unsecured debt: This is a loan that does not require collateral. Examples of unsecured loans include credit cards, unsecured credit lines, medical bills, student loans, payday loans, and utility bills.

These are the most common methods of debt consolidation. As you can see, some of them are only for people with unsecured debt.

1. Credit card balance transfer: You can negotiate with your bank or credit card provider to lower interest rates or transfer the current balance to a new card with a lower interest rate. However, renegotiation/new interest rates may be temporary and creditors may charge a certain percentage of the transfer balance as a fee, so make sure you read the beautiful print.
2. Debt Consolidation Loan: This option is available through banks or financial institutions. Instead of owe substantial balances on multiple credit cards, individuals can pay the full amount through a debt consolidation loan and then repay the loan with monthly payments. Typically, debt consolidation loans can only be used for unsecured high-interest debt. While a lender that will include collateralized debt, such as mortgages or auto loans, it is often disadvantageous because these types of debt tend to have relatively low interest rates. Debt consolidated loans usually have interest rates between 8% and 12%.
3. Debt Consolidation Plan (DCP): This is an alternative to debt consolidation loans. Clients work with nonprofit credit advisory agencies, which will negotiate with creditors on their behalf to reduce interest on unsecured debts while also consolidating unsecured debts into a single, lower monthly payment. DCP can only include unsecured debts.
4. Home equity loan: If you own a home, you can get a home equity loan backed by your property as collateral. The amount of the loan will depend on the valuation of the home. Homeowners can borrow up to 80% of the assessed value of their property, minus the outstanding mortgage.
5. Reverse mortgage: If you are a homeowner 55 or older, you can consider reverse mortgage, also known as “equity release.” While retaining ownership, you can borrow up to 55% of the current home value. If you sell, move, or die, you must repay.
6. Credit limit: If you are eligible for a credit line, you can use it to pay off higher interest debts like credit card balances. Remember that if you get a line of credit, you are supporting it with an asset (such as your home) in the case of a home net worth credit (HELOC). If you don’t make a payment, you may lose the asset.

The debt consolidation options available to you depend on several factors, including your assets, debt type, credit score, income level, and expenses. Generally, if you find that your debt (excluding secured debt) exceeds 20% of your income, you may find it helpful to get professional advice from a nonprofit credit adviser to better manage your debt.

When asked who would benefit the most from the debt consolidation program, credit adviser Randolph Taylor said it was for “those who have debt, they have a hard time paying it back”. He added: “If they find themselves unable to actively address debt as they wish, then DCP is certainly a serious consideration option.”

People from all levels of income and professional backgrounds can benefit from speaking with certified nonprofit credit consultants. The counselor will evaluate your financial situation and determine which options you can use. Rest assured, they will keep everything confidential and provide unjudgmented areas. If you are looking for debt advice and would rather not talk to someone, now you can also use Mariposa, the AI debt management agent from Chretd Canada, for a full debt assessment.

Nonprofit credit consulting agencies have many benefits. They provide debt management services, including one-to-one consultation, debt consolidation programs, and educational seminars and workshops.

Be sure to do your research and find a well-reputed agent based on customer recommendations or online reviews. Check for industry qualifications, such as being an accredited member of Canadian Credit Consulting and avoid any agency that costs not far from it.