Why not resolve to deal with your debt?Jan 29, 2015
It is that time of year – many of us are making resolutions to start the year off on the right foot. While adopting a healthier lifestyle is always a popular resolution, why not consider adding healthier personal finances to your list of resolutions? The timing could not be better, especially if you currently find yourself carrying as much debt as you can handle.
Despite the recent surprise cut in interest rates, many financial experts are recommending that Canadians deal with their current debt load rather than pile on additional debt. Interest rates will eventually go up as predicted. Even a slight increase in interest rates could make it difficult to meet your obligations, so the more debt you carry, the more important it is to deal with it as soon as possible. There are a number of debt relief options that may be available to you. To learn more about what will work best for your circumstances, it is a good idea to consult a debt relief professional.
Create your own debt repayment plan
If your debt load is not too significant and you have steady income, it may be possible to develop a debt repayment plan of your own. This will require a good budget and a strong resolve to pay off your debts over a period of time. In these types of plans, it can be encouraging to pay off smaller debts first in order to feel that you have made progress. There are also a number of resources and tools available to help you develop a repayment plan of your own.
Consolidate your debt by refinancing your home
If you own a home, there are advantages to obtaining a debt consolidation loan by refinancing your home. The interest rate is generally more favorable and the payments terms can be structured to fit your monthly budget. If you have adequate equity in your house, you may be able to draw on your existing mortgage or obtain a second mortgage in order to pay out your unsecured debts. Unsecured debts are money owed without collateral, such as credit cards, lines of credit, bank loans, and taxes. The disadvantages of this option are that your mortgage payments will potentially increase if interest rates increase. Also, if the value of your house declines, you may end up in a negative equity position – meaning the balance of your mortgage will be higher than the value of your house.
Debt consolidation loans
A debt consolidation loan pays off a number of different unsecured debts (like credit cards and lines of credit), often at a lower interest rate than you are currently paying. You make one monthly payment to the bank or company who granted you the loan. The interest rate and repayment terms on this loan will vary given the amount of debt that you need to consolidate and your level of income.
There are also non-profit organizations that assist people in repaying their debts. For example, in Alberta, Money Mentors administers the Orderly Payment of Debts program. In this program, you can consolidate your unsecured debts at an interest rate of five per cent and pay out the loan over a four year term with equal monthly payments. The Credit Counselling Society of British Columbia offers a similar service.
A formal debt solution may be your best option
If you do not have a house or have limited income, a debt consolidation loan may not be a viable option for you. A consumer proposal is a formal, legally binding debt solution that allows you to pay back only a portion of your unsecured debts with no interest. Only a Trustee in Bankruptcy can administer a consumer proposal in Canada.
Dealing with debt is best done quickly. Rising interest rates and other charges can quickly make your debt spiral out of control. Be sure to have all of your options explained by a debt relief professional as soon as possible so as the best decision can be made early on. Resolving to tackle your debt not only puts you in control of your finances, it may very well provide peace of mind and make for a better 2015.