You are increasingly finding that you are over your head in debt and are unsure of what to do. You consistently pay the minimum monthly payments on your loans, lines of credit, or credit cards, but the truth is, this is not going towards the balance but only paying the interest off. Therefore, you are doing nothing to pay down your debt, only doing enough to hold your head above water. Sometimes it is best to consolidate all of your outstanding debts into one monthly payment in an attempt to pay down the debt and here are situations when this should definitely be considered.
1. High interest rates
While interest rates on personal loans and lines of credit in Canada are usually around 6%, they can range anywhere from 9% to 25% for credit cards. The interest rates on credit cards can therefore be overwhelming and mean that if you are only paying the minimum monthly payments, you are getting nowhere close to paying it off in full.
If you have one or more credit cards with a high interest rate, consider consolidating into a personal loan or line of credit. This means you will have one monthly payment with an interest rate around 6% and it will go more towards the principal balance as opposed to just the interest.
2. You are missing bill payments
If you are missing bill payments due to most of your money going towards paying off debt, you definitely have a problem. Missing bill payments will lead to short-term issues such as services such as heat and hydro being cut off and you still having to pay the bills or long-term problems such as bad credit scores.
Debt consolidation is a smart option because it can allow you to pay down debt faster and simultaneously improve cash flow. Paying multiple debts with multiple monthly payments at multiple interest rates tend to eat up your money. Paying one monthly payment at one low interest rate will free up money to pay your bills with.
3. You own a very expensive home
If you have owned your home for a few years and have paid off quite a bit of the mortgage, your debt consolidation options may increase in number. If your mortgage is up for renewal, you can choose to refinance and roll your outstanding debts into a new mortgage or apply for a home equity line of credit and transfer your debts into that. With mortgage interest rates in Canada being around 2.9%, this option allows you to pay more towards the balance of the debt and spread it over the length of the mortgage.
A home equity line of credit’s interest rate averages at about 3.5% making it another attractive option for debt consolidation. Both of these options require you to have at least 65% equity in your home. Therefore, if you have bought your house just recently, you probably will not qualify. Also, if you refinance your mortgage early, you may face penalties from the lender which will just add to your existing debts.
4. You can’t afford the payments
Debt consolidation means the restructuring all of your existing into one payment. While payments and interest rates are lower, the amount of your debts remain the same. You will be held to task to pay off the debt until it is paid in full so you must ensure that you are able to do so. If you are unable to pay off all of your debts in full then debt consolidation is not for you. Instead, debt settlement, debt relief, or filing for bankruptcy may be better options.