Debt consolidation is the process of refinancing a person’s debt by using one large loan to pay off many small loans. Typically is done in order to get a lower overall interest rate, to reduce other miscellaneous fees associated with the individual debts, and for the convenience of making a single payment instead of many payments.
The kind of debt also impacts the interest rates charged. For unsecured debts such as credit cards and personal loans, the interest rates can range anywhere from 19% to 29%. By putting up a piece of real estate as collateral, a person can qualify for a loan that is secured against their property. Since this is a secured debt, it will carry a lower interest rate and it can be used to pay off more expensive debts. Our team of specialists has years of experience in setting up debt consolidation loans in Ontario and are available to discuss your particular situation.
Benefits to Debt Consolidation Loans
Many people who struggle to make all their loan payments each month may find debt consolidation loans in Ontario to be helpful. Generally, a registered mortgage will allow a person to borrow at the lowest possible interest rates from both institutional banks and private lenders. Mortgages are one of the least risky types of loans for lenders since they are able to recover their money through a property sale in the case of non-payment. A mortgage also allows people to borrow greater sums of money ($20,000 and more) whereas a credit card will have a limit of a few thousand dollars.
Common Reasons to Consolidate Debt
When people consolidate their debts they typically are looking to achieve one or more of the following objectives:
- Lower Monthly Payments: When consolidating debts you have the option to set a longer payback term in order to reduce the monthly payments.
- Lower the Overall Interest Rate: Mortgage interest rates are lower than interest rates for other types of loans.
- Improve Credit Score: A debt consolidation loan can be used to pay off credit cards and other debts which, left unpaid, will reduce a person’s credit score.
Methods of Consolidating Debt
The primary methods we use for consolidating debt are to refinance existing mortgages or to set up a new first or second mortgage.
When to Use Mortgage Refinancing
Mortgage refinancing is best used when the rates on the existing mortgage are much higher than that of a replacement mortgage. By breaking an existing mortgage you will be expected to pay a three-month penalty fee. When deciding to refinance a mortgage, you must determine if a lower interest rate can help save money when considering all relevant penalties and fees.
When to Use First Mortgages
A first mortgage can only be placed on properties with no existing mortgages. As long as there is enough equity in the property, a mortgage can be placed on it by either institutional lenders or private lenders. A first mortgage is the least risky type of mortgage and will have rates that are lower than those of second mortgages.
When to Use Second Mortgages
For properties with an existing first mortgage, a second mortgage can be placed on the property if there is enough equity. While more expensive in terms of interest rates than a first mortgage, a second mortgage typically carries a lower interest rate than many other types of debt. A second mortgage allows you to leave the existing mortgage alone and get you the money you need to pay your debts.
Private Lenders That Offer Debt Consolidation Loans
It is general knowledge that institutional lenders such as banks offer the best interest rates, but not everyone can qualify for a bank loan. Many people who are considering debt consolidation services have failed to make payments in the past and look to debt consolidation services to prevent their situation from worsening. People who have failed to make debt payments will have a damaged credit score, and Canadian banks require a high credit score to qualify for a loan. Private mortgage lenders have become a popular alternative for mortgage seekers who have been turned away by banks. The main differences these lenders have with banks is that they charge higher interest rates and have fees related to setting up the mortgage. Our team has a network of private mortgage lenders, and we help our clients get multiple private lender quotes. We help our clients understand the fees for each quote and we advise on which quote we feel will save the most money in the long run.