There are so many debt consolidation options in Canada. There are about 8 that are available for everyone with their own sets of pros and cons depending on someone’s needs. In today’s article, we will talk about the most popular ones especially for individuals who are self-employed or may have a less-than-stellar credit score.
Use a Debt Consolidation Loan to Take Care of Debt
A debt consolidation loan is when money is given by a finance company, a bank, or a credit union as a loan to someone so that person can pay off outstanding debts and ‘consolidate’ or ‘combine’ them together as one big loan.
Below are advantages of debt consolidation loans:
- Having only 1 monthly payment to pay
- Having a set time of typically 2 to 5 years to pay the loan
- Low fees compared to other loans
The interest rates for debt consolidation loans are usually negligible if via a credit union or a bank, but that is dependent on someone’s credit score, net worth, and if there is collateral. They usually take any good asset that they can sell if the borrower fails to pay the loan. Banks usually charge interest rates of between 7% to 12% while finance companies usually charge more than 30% for unsecured loans or averaging at 14% for secured loans.
Note that debt consolidation loans usually require collateral, have a higher interest rate than a home equity loan, and require a decent credit score. It is very rare for banks to approve a debt consolidation loan without security unless someone can prove to have a high net worth, a co-signer, or a very strong credit score
Use a Second Mortgage or a Home Equity Loan to Consolidate Debt
Refinancing one’s mortgage, getting a home equity loan, or a second mortgage all just means that a bank or a private lender will lend the borrower some money against the borrower’s home equity. This means that if a home is worth $500,000 and the borrower still needs to pay $200,000, then that means that his or her home equity is $300,000. When a borrower wants to tap into that home equity, a mortgage refinance, home equity loan, or second mortgage will be the way to go to access funds for debt consolidation. The second mortgage is paid on top of a first mortgage. You can talk to us to learn more about a second mortgage, a mortgage refinance, or a home equity loan.
Interest rates for second mortgages are typically higher than those for a first mortgage. On very rare occasions, it is possible to get nearly the same rates depending on a lot of factors. It is also possible to combine the interest of your first mortgage and your second mortgage depending on the lender and their due dates.
Second mortgages are great for consolidating debts because they usually have low-interest rates and flexible payment arrangements. The downside is that there are lots of fees and you are required to have a certain amount of equity.
On the fence whether you’ll apply for a debt consolidation loan or get a second mortgage? Contact us and we’ll be happy to discuss your options according to your needs.