Dealing with Debt
Debt is hard to manage, but COVID-19 has made it worse for many Canadians. A recent survey by Credit Counselling Canada has found that nearly 1 in 4 Canadians don’t know where to turn to if they hit ‘debt rock bottom.’
Here are the top 10 ways to slash your debt during the pandemic and avoid hitting ‘debt rock bottom’.
- Talk to Your Lender
If you think you are going to run into problems managing your payments, speak to your lender right away. Learn what options are available for you. You may be able to renegotiate the terms and conditions of your loan so that you can continue to make regular payments and keep your lender happy.
- Consider Mortgage Refinancing
Mortgage refinancing means taking out a new mortgage to replace an old one. A refinanced mortgage is worthwhile if the new interest rate is lower than what you were paying. A lower interest rate means lower mortgage payments which can help you manage paying other debt incurred during the pandemic.
- Consider Getting a Debt Consolidation Loan
Debt consolidation means totalling up all your credit card and other (non-mortgage) debts and getting a loan to pay them all off. Interest rates for consolidation loans are usually lower than credit cards, helping you save money while repaying your loan.
- Prioritize Payments for Secured Debt
Secured debt means that the loan is backed by something of equal value, usually your property. The lender has legal authority to use your property to get their money back if you fail to make payments. Paying this debt off first helps you keep your property and potentially use it to secure other loans.
- Prioritize Payments for High-Interest Debt
High-interest debt costs more the longer it takes to pay off. Eliminate high-interest debts before debts with lower interest rates.
- Pay Off Your Smaller Debts
It can be encouraging to start small. By paying off your smaller debts early in your debt recovery plan, you gain confidence, reduce stress, and improve your credit score.
- Pay as Much as You Can Each Month
If you have extra cash at the end of the month put it to use. Make an extra payment on your highest interest debt or wherever your debt agreements allow you to make extra payments.
- Reduce Your Expenses
Cut back on non-essential spending. Ask yourself, “what do I absolutely need?”
Besides essential living expenses (food, shelter, utilities), consider what else, if anything, is critical over the next few months. Don’t spend your money on anything else, at least for the short term.
- Create Another Income Stream
Look for a second job in your local community or by reviewing online job sites. You can use your computer or phone to work remotely in a variety of industries. There are also job counselling services available through provincial and federal employment offices.
- Discuss Debt Settlement Options
You might explore debt settlement when unable to repay debts despite all other efforts. Debt settlement companies are hired to negotiate with the lender on repayment or partial forgiveness of the borrower’s debts. Lenders have to agree to work with debt settlement companies for this negotiation to take place. High fees are typically charged to borrowers for this service and there may be very strict repayment terms.
It is important to note that debt settlements stay on your financial record for years and can significantly lower your credit score.
The Truth About Debt Consolidation
Debt consolidation is a great way to pay your various debts through one payment plan with one lender.
The total amount you owe has not changed, but most debt consolidation loans have lower interest rates than many other types of loans. The savings from paying a lower interest rate could be significant.
Debt consolidation improves your credit score because you are paying off previous lenders. Of course, if you fail to make payments to your new lender, that will negatively affect your score.
Debt consolidation loans are usually approved for borrowers who have equity in a property, such as a house, empty lot or high value vehicle. Lenders can lend up to 80 percent of the value of the property. The property is used as security for the loan. This means if the borrower is late or skips payments, the lender could force a power of sale of that property and get their money back.
Debt consolidation loans can come in many forms. There are many ways to get a debt consolidation loan, chief among them are; first mortgages, mortgage refinancing, or second mortgages. Each come with their own fees, interest rate and additional requirements depending on the option you chose and the lender you are working with.
Debt Settlement vs. Debt Consolidation
Borrowers turn to debt settlement when they have unsecured loans that they can’t pay off. Debt settlement companies represent the borrower and negotiate new terms of the outstanding loan(s) with the lenders. Without this option, or a successful negotiation, a lender could take a borrower to court to recuperate the debt.
The fees charged by debt settlement firms could be significant. However, debt settlement may be the best option when all other ways to pay loans back have been exhausted. It is a way to avoid being sued by the lender.
If you have equity in a property such as a house, debt consolidation is a practical way to rebuild your financial health and credibility. It is not a last resort, but rather a way to streamline how you manage your debt so you can pay it back faster.
What Should I Know About Debt Consolidation
Debt consolidation loans can be used for any kind of debt. There is usually flexibility in terms of the payment amounts and timeframes for paying off a consolidation loan. If your consolidation loan is from a private lender, than you only need to pay the interest each month.
You need equity to secure a consolidation loan and your loan amount is limited relative to how much equity you have in a property. Should you fail to comply with the terms of a consolidation loan, your lender could initiate power of sale of your property. Make sure you have the ability to make full payments on time all the time.
Should I Consider a Debt Consolidation Loan?
If you have multiple debts, paying high interest rates, and feeling constrained financially, debt consolidation could be an effective way to repay your debts and improve your credit score. If you have equity in property is it worth considering this option.
To find out if you have enough equity to qualify for a debt consolidation loan, use the Loan-To-Value Ratio Calculator to learn if you qualify for a debt consolidation loan and how much you can receive. If you do not qualify you may need to look into a debt settlement, but make sure you research the company you want to work with. The government of Canada has warned consumers that debt settlement companies cannot guarantee results, and to check for complaints filed with the Better Business Bureau.
If you want to learn more about reducing debt, debt consolidation loans and debt settlements, call the Mortgage Broker Store for free advice speak with local lenders and brokers about your finances and how you can improve them.