Debt happens to the best of us, and it can be distressing to the extent that it's harmful to your health.
There are a lot of reasons people wind up in debt: poor money management, loss of income, divorce, dependency issues, or sometimes a perfect storm of many factors. At MetCredit we're not here to judge—our job as debt collectors is to start the cash flowing again.
When the debt problem is big and rebudgeting is not enough, refinancing can be the best way to get rid of high-interest debt and create a manageable repayment plan.
How much difference can refinancing make? If you are currently carrying credit card debt, you could be paying up to 30% interest, at a time when it's possible to borrow money at the lowest rates in history.
Even so, according to BMO's latest Annual Debt Report, the average Canadian household now pays $1,165 per month in interest, and those in real trouble are often paying substantially more. If you are among those making the minimum payment on credit card debt, your payments are entirely eaten up by interest, which could leave you spinning your wheels forever.
Here are three practical approaches to getting rid of costly problem debt and getting back on track:
1) Debt Consolidation. If you are carrying a lot of high-interest debt like credit cards or payday loans (which can legally have annual interest rates of up to 60%), debt consolidation is usually a wise solution. It's simple: all your debts are brought together into a single loan (sometimes a refinanced mortgage on your home, if you have one) and you receive the funds to pay them down. You are left with a single payment that is less than what you were paying before.
2) Home Equity Loans: If you own a home worth more than your mortgage, you may qualify for a Home Equity Line of Credit (HELOC) or a loan that can be used to pay down your problem debt. Especially with today's low interest rates, this can be a substantial savings on high-interest debt.
3) Balance Transfer: If your debt is primarily in high-interest credit cards, it may suffice to transfer the balance to a low-interest credit card, as long as you are committed to paying it down. Bear in mind that even the lowest credit card rates are usually at least 8.9% unless you've got a fantastic credit score, generally more than you would pay on a line of credit. If you use this option—actually, if you use any of these options—cut up and cancel your old credit cards to avoid winding up in even bigger trouble!
Where to begin? If your credit is in good shape, you should have a lot of choices for a debt consolidation loan or line of credit. On the other hand, if your credit rating has been damaged, your options will have narrowed considerably.
There are a few good Canadian lenders who work with people with poor credit, and several others who are opportunistic. I can recommend a couple of reputable lenders who have helped many of our clients over the years:
One Stop Mortgage is a courteous and hardworking provider of mortgages to homeowners in BC and Alberta with poor credit, no credit, a history of credit collections or a previous bankruptcy.
Based in Toronto, Lending Money (LM Financial) specializes in mortgages, secured loans, unsecured loans and title loans as well as exit plans for your financial troubles and short term credit repair planning. They have 6 offices Canada-wide.
Regardless of the approach you choose, it is imperative that once you refinance, you ditch the old habits that got you into this mess. I recommend credit counselling by a not-for-profit consultant, and you can find a good local one through the Canadian Association of Credit Counseling Services. Staying on the right track will be as important as getting onto it in the first place, and you will need new tools and strategies to be successful.