The cost of living is rising in the country, and consolidation loan balances are keeping pace. Debt consolidation is about combining what you owe from different lenders, like credit cards or other loans, into a single payment. Combining multiple debts into one single larger loan might get you better terms like lower interest rates and lower monthly payments.
The most recent Equifax® Canada Market Pulse — Consumer Quarterly Credit Trends Report provides some statistics that explain why this type of loan is gaining popularity.
- By Q4 2022, total consumer debt totalled $2.37 trillion. That represented a spike of 6.2% from Q4 2021.
- Q4 2022 also saw an increase of credit active consumers (those with at least one product) of 3.2% over Q4 2021.
Adding to this trend are higher interest rates, which have plateaued as of September 20th, 2023, at 5% through the Bank of Canada. Getting a complete picture of this surging wave of debt requires more details.
What factors have contributed to the surge in consolidation loan balances?
Beyond the ones already mentioned, there are other factors that are contributing to consolidation loan balances. These types of loans are trending upwards as people find financial problems like rising interest rates hampering their budgets.
The Rising Cost of Living
Recent news reports ( September 20, 2023) say 77% of respondents to a poll say the rising cost of living is at the top of their concerns. These people are saying that inflation is hampering their future financial picture. Rising interest rates are also harming this same group.
The Increasing Reliance of Credit
Equifax recently reported that credit card balances for Canadians have reached an all-time high ($107.4 billion) in Q2 2023. They are also reporting that the total Canadian Consumer Debt has hit 2.4 trillion during the same time frame.
Debt consolidation loans are a viable answer for people who are suffering from rising consumer debt. These products can help you combine multiple debts, which can include student loans, personal debts and high-interest credit cards, into one monthly payment.
They can result in a lower monthly payment and longer repayment terms. If you’re a Canadian facing mounting debt challenges, it’s worth taking the time to understand how these loans work.
How does consolidating debt through a consolidation loan work?
A debt consolidation loan brings all the money that you owe in smaller loan bills and debts and combines them into one monthly payment. You can agree on how these loans will be paid off by working with your lending Institution. Some institutions just deposit the consolidated loan amount in your account and let you pass out the money.
There are several different payout methods.
A Second Mortgage/Refinance or Home Equity Loan
These are terms used to refer to bank loans taken out against the portion of the house or property you own. One of the advantages here is the fact that you can have flexible payment arrangements and can extend your amortization.
The disadvantages include the fact you’ll need to pay for fees involving a setup. You’ll also need to have enough equity in your property.
A private mortgage lender can also negotiate one of these loans to reduce your payments into one monthly number using your home as collateral. Borrowers aren’t taking on any undue risk as long as they can manage the payments on the debt consolidation loan.
Are there any potential drawbacks or risks associated with consolidation loans?
Like any financial product, there are risks associated with these loans.
- Consolidating loans doesn’t change bad financial habits. You can prevent yourself from getting into trouble again by laying the groundwork for a healthy financial future with a budget. Examples include what are called zero-based budgets.
- A debt consolidation loan comes with different fees, including closing costs.
- Keep in mind you may be getting a lower interest rate with one of these loans, but there’s another consideration. Borrowers risk using any collateral that they put up to secure the money.
Like every other kind of loan, having a good strategy to pay the money that you owe is always essential.
What steps can borrowers take to manage and pay off consolidation loan balances effectively?
As you might imagine, the credit rating agency Equifax has excellent tips for managing and paying off balances. A debt consolidation loan means you don’t have to prioritize payments and put the higher interest ones first.
However, you need to make sure things like basic living expenses are covered, and you’re not breaking a monthly budget while repaying this loan.
Following the 50/30/20 rule can help. This breaks down to spending 50% of your income on must-haves. Another 30% should be spent on wants and a final 20% on paying down debt.
How does the surge in consolidation loan balances impact the overall economy?
For individuals, debt consolidation is a good option if you’ve got more debt than you can handle. For the big picture and the overall economy, it’s a positive trend where people are looking to bring down their household debt numbers. Consider the fact a recent CMHC report sounds the alarm that Canada has the highest level of household debt amongst all of the G7 countries.
Unmanaged debt of that size can make our economy vulnerable to a global economic crisis. In 2008, this debt was about 80% of the size of the entire economy. By 2021, the debt had exceeded its size.
Need Help Managing Your Own Debt?
Mortgage Broker Store specializes in several different mortgage-related products. Mortgage requirements that don’t meet traditional lending institution requirements are one of our focuses. We have private lenders, brokers, and licensed mortgage agents on the team. We can help you prepare for and get a private loan that will suit your needs.