75% of Americans are struggling with one type of debt or another. And after the COVID-19 pandemic, this number has only increased. Whether you have a high-interest credit card or a high-interest unsecured loan, finding the right strategy can help make paying it off much easier. One option is debt consolidation, which can also streamline your uncontrolled debt. Learn more about how debt consolidation works here. However, as you’re trying to pay off your loans, searching for a new low-interest rate loan might seem like an enticing idea. But this is not always the best choice. In some cases, it could even do more harm than good. Paying off your loans with the right depth of assessment and careful planning can be the key — we’ve listed five ways to get lower rates on outstanding loans below to help you get started.
Consider debt consolidation
Debt consolidation is a tool that lets a borrower combine their small, high-interest loans into one. This helps the borrower take on a lower monthly payment. Generally, it can be used to consolidate any of the following types of loans: Large credit card balances, such as lines of credit High-interest loans, like unsecured loans Student loans and vehicle loans Expenses that come up unexpectedly Debt consolidation is not for everyone. But for some Canadians, it’s the best way to manage and pay off outstanding high-interest loans. With debt consolidation comes peace of mind for the borrower. Before signing anything, it’s important to do the math to make sure this is the best choice.
Home equity loan
One of the fastest and easiest ways to secure a loan is by tapping into your home equity. Home equity is the market value of your home minus all its obligations, such as a mortgage. It’s also known as a second mortgage or refinancing. However, you need to keep your house as collateral to avail this kind of loan. To get the desired amount, you need to have sufficient equity in your home. There are also additional charges for setting up the second mortgage.
Pros and Cons of a Home Equity Loan
Tapping your home equity is one of the fastest and easiest ways to secure a loan — with an attractive interest rate that’s much lower than other kinds of loans. Plus, you can prolong the payments and make them much easier with a home equity loan. However, you need to keep the following things in mind: You have to keep your house as collateral, so it’s essential that you have sufficient equity — which means your house needs to be worth enough (after deducting any debt). You’ll have additional charges for setting up the mortgage too.
Line of Credit
Lines of credit or overdrafts can be great ways to consolidate high-interest outstandings. It will depend on your income, your credit score, or if you have collateral. Your bank or credit union will offer you a line of credit. It works like a credit card. You’ll get a predetermined limit to spend, and then you’ll pay interest on what you actually spend, not just the overall limit granted. However, there is an option to make payments on only the minimum amount due for the month, just like with a credit card. A line of credit can be helpful to manage your finances in the following ways:
- Your Interest rates are lower than unsecured loans
- You have more flexibility in managing the minimum monthly payment
- You have freedom in how to repay the loan according to your own preferences
Here are some things you need to be careful about while taking a line of credit:
If you fail to make more than the minimum amount due each month, it can hurt your financial situation. Payments will change as rates change (i.e. interest rates will increase and payments will need to go up) Therefore, if the rate goes up and the minimum payment is raised, your debt will accumulate even faster, leaving you in a worse situation.
The Pros and Cons of Credit Card Balance Transfers
Credit card balance transfers have been around for a long time now and still remain to be one of the most popular credit card offers. When used judiciously, you can take advantage of promotional interest rates, which may be 3-4%. Balance transfers in one place can streamline multiple payments into one. There are some cons as well: Most often, people who don’t qualify for low-interest credit cards. Promotional interest rates last for a few months and you might have to deal with higher-interest rates after that. You can fall into another type of debt trap if you only pay the minimum monthly payment.
Debt Repayment Programs
If the methods above don’t work for you, you may want to consider a debt repayment program as a last resort. A lot of Canadians use Consumer Proposals or Debt Management Programs to consolidate their debt into a more manageable monthly payment. You can restructure your debt, which may mean you pay less or no interest. This makes it easier for you financially and helps you stay out of the stress of not being able to afford an upcoming payment. There are some limitations though. It may not be an option for everyone and will impact your credit score in the meantime. Plus, you have to pay a fee for credit counselling.
Unfortunately, there are many misconceptions where most people just focus on a loan’s interest rate when they should also be considering its reliability. Choose a lender that will help you sail through the process in the most effective way.