A comprehensive guide to consolidation loans in Ontario
Balancing credits cards, mortgages, and other outstanding debts is common in Ontario and all over Canada. In fact, having debt is a natural part of finances and is part of building your creditworthiness. However, multiple payments can become a handful to manage, so many Canadians choose debt consolidation as a solution to simplify their finances. There are many options available, and among the options is a home equity loan from Alpine Credits.
What is a debt consolidation loan?
A debt consolidation loan is a way a borrower can use a lump sum loan from a financial institution and/or alternative lender for the purpose of consolidating multiple debts. Borrowers receive the funds and use it towards their outstanding balances. After paying most, if not all their debts, they can then focus on just paying back the single source of the loan with the benefit of a single payment.
Each institution has their own set of criteria and will have different expectations based on your specific financial situation. For example, some lenders may inspect a borrower’s payment and credit history, while others may look at separate aspects like the value of your home equity instead. Consolidating your debts also doesn’t have to be a last resort. You can do it just to simplify your monthly payments.
Why to consider a debt consolidation loan
As previously mentioned, debt consolidation is not just for those who are struggling to manage multiple payments; it can also be to improve your overall financial situation. The results of getting a debt consolidation loan are:
- reduced interest payments
- new budgeting plans
- simplified payment schedules
- debt organization
- credit score improvement
Types of consolidation loans available in Ontario
Consolidation loans can be considered an umbrella term for solutions that help people manage their outstanding debt balances. In Ontario, there is more than one way to merge your debt into fewer and more convenient payments.
Balance transfer credit cards
It is common for Canadians to have multiple credit cards, so to reduce overall interest and the number of payments, people may apply for another credit card that consolidates their outstanding balances. A balance transfer card typically has lower interest rates than a classic credit card, and some banks even offer cards that have no interest in the first few months.
Since traditional financial institutions are usually the ones who offer balance transfer credit cards, they require applicants to meet a specific criterion, like having a good credit score or stable income history. Additionally, transferring the balances may come with a fee that is equal to a small percentage of the overall balance. When discerning if a balance transfer credit card is right for you, be sure to compare the interest rate and balance transfer fees to see if it helps you save money overall.
When it comes to loans, most people may think of unsecured loans first, and they can be from both banks and alternative lenders. An unsecured loan is a lump sum of money that eligible borrowers can put towards extra expenses or to consolidate their debt. With unsecured loans, the interest rate can be lower than credit card interest rates, but it will depend on your credit score and how the lender rates your creditworthiness.
Typically, individuals with higher credit scores are offered larger loans with lower interest rates which can be lower than credit card rates while individuals with lower credit scores are typically offered smaller loans with higher interest rates. With an unsecured loan, the loan is not secured by an asset, which is why lenders prefer borrowers with a more favourable financial history as this acts as a form of security to the lender as it is more likely that the borrower will be able to repay the loan.
The opposite of unsecured loans is secured loans, which are backed by one of the borrower’s assets. A piece of property or a vehicle are the most common assets. Because the loan is secured by valuable items, the loan typically comes with a lower interest rate and more flexible standards than its counterpart, unsecured loans.
The important detail to remember about secured loans is that the collateral asset can be collected if the borrower is unable to fulfill their obligation to repay the loan – this is where the lender obtains their ‘security.’ Secured loans are more flexible and available but remember to assess your finances to see if you can maintain such a loan through its term to repayment.
Home equity loans
A home equity loan is a type of secured loan that usually has the least number of requirements than other types of consolidation loans. As a secured loan, home equity loans are based on the equity of your property and thereby is secured by the property as well.
As a result of the security that comes from property, credit scores and financial history are not usually a big part of the approval process. Instead, the equity, which is the difference between your outstanding mortgage balance and your property value, plays a bigger role. Home equity loans can reach higher values and still have comparatively lower interest rates than credit cards and other loans.
You can find home equity loans at both banks and alternative lenders. At the bank, getting a home equity loan may still require applicants to have a good financial history and credit score. Alternative lenders, like Alpine Credits, only take your home equity into consideration.
The application process in Ontario
Depending on which lender you decide on, the application process and the criteria could look a little different. Regardless, you can expect a general procedure at every lender.
- Fill out an application form—most lenders have their applications forms online.
- Finalize application—the lender will work with you to submit any required documents and allow you room to make your decision.
- Receive the loan—the time that you get the funds could be weeks or months, depending on how fast your application is processed and approved.
- Pay outstanding balances—since it’s a debt consolidation loan, be sure to use it for that purpose and avoid accumulating more debt.
- Repay the loan—you and the lender will have agreed on the frequency, interest, and amount when you had finalized the application.
Considerations before getting a loan
Getting a loan to cover a portion or all your outstanding debts is a big financial decision. Before fully committing to it as the proper solution, remember to consider some key factors of consolidation loans. While there are many others to remember, some of the important ones are
- your budget—it is important to be realistic and review your finances to see if your budget can handle additional debt.
- loan purpose—whether the loan is for debt consolidation or a down payment for a house, it is important that the money has a clear purpose.
- loan terms and repayment plan—comparing offerings from different lenders is important because their loan offerings will differ, and you will have to choose what is best for your situation.
Managing finances after consolidating debt
Consolidation loans are a great solution to reduce your number of payments and increase your credit score. Despite it being a popular way to help people with their finances, having your debt consolidated is an even better opportunity to build good financial habits. Rather than resulting in a loan to fix every financial situation, creating a better budget, and reducing the sources of debt is an even better practice.
Conclusion: the financial landscape in Ontario
Everyone in Ontario has their own unique financial challenges just like everyone else in neighbouring provinces, but the same solutions are available to them. One of the more common solutions is with a debt consolidation loan. Consolidation loans can help you achieve financial stability, because it reduces your monthly payments and helps you understand your own finances from a different perspective.
Both unsecured and secured loans are available at banks and various lenders. From Alpine Credits, you can find a secured home equity loan that can cover all your outstanding obligations. Being a secured loan, the interest rates are comparatively lower, and the application and approval requirements will be more flexible.
Frequently asked questions
The average interest rates for debt consolidation loan in Ontario and across Canada will change depending on numerous factors. The lender you choose to collaborate with will matter as banks will consider your credit score and income and base an interest rate off those aspects. Meanwhile, alternative lenders may offer you different loans that you can use towards debt consolidation, like home equity loans. As such, the interest rates will be different for those loans as well.
Getting a loan to consolidate your debt is possible, even if you have bad credit. It may be a challenge to receive it from traditional financial institutions, so other solutions are available such as credit card transfers or home equity loans from alternative lenders. An example of an alternative lender is Alpine Credits who don’t need to examine credit score to give out a loan.
A few possibilities could happen if you find yourself unable to fulfill your debt consolidation loan, such as late payment fees, changes to credit score, and asset collection. It all depends on your agreement with your lender.
Taking on another loan will naturally lower your credit score by a few points, but debt consolidation can ultimately improve your credit score. Most loans for consolidating your debt can cover most if not all of your outstanding obligations. As you continue to make regular payments to your consolidation loan lender, you’ll see a rise in your credit score.
A debt consolidation loan is not an exclusive product from a personal loan, and a personal loan can be used towards outstanding obligations. Lenders may advertise ways to use their loans, but ultimately, it’s up to the borrower on how they want to use the funds.