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However, you can also use your existing assets (such as your home) to have even more leverage with creditors.So debt consolidation can also involve a secured loan against an asset that serves as collateral, most commonly a house.You may still have access to your credit cards — don’t be tempted to use them and go further in debt.Financial institutions will expect prompt payments and if you found the debt hard to pay before it may still be a challenge to repay the new consolidation loan.Debt consolidation is a popular (and legal) way to significantly lower your debt in Canada.In this guide, 20-year financial expert Paul Murphy takes you through the basics of why Canadians use debt consolidation.Debt consolidation is about increasing your leverage with the primary goal of lowering your interest rate.The interest rate charged by a financial institution for a personal loan is usually lower than the rate charged for a credit card.
Debt, as you know, is a struggle against interest payments. And once your debt rises above ,000, it becomes very hard to pay down the interest.
According to the Government of Canada, “this option [debt consolidation] may be suitable for debts such as those relating to credit cards, public utilities or other consumer loans.
However, not all debts can be combined into a consolidation loan — a mortgage cannot be included, for example.” As I explained, debt consolidation combines your smaller loans into a larger loan with the goal of getting a lower interest rate.
Using your house as collateral in debt consolidation can help you negotiate a lower interest rate.
With an asset on the table, banks will see you as a less risky investment which means you increase your bargaining power with lenders.
According to Statistics Canada, the ratio of household credit market debt to adjusted disposable income crept up to 166.9 percent in the third quarter, up from 166.4 percent in the second quarter.