When paying down debt, it can be exhausting and rewarding. And when you have multiple balances to take care of each month, sometimes it can feel like you’ll never be debt-free and stuck on a treadmill. Statistics Canada says we are now average 186.2 per cent for the ratio of household debt to disposable income. This means there is $1.86 in credit market debt for each dollar of household disposable income. When you spend more than you earn, it’s a sign of a deeper personal finance issue.
Whether your finance goals are to reduce your debt, save on the cost of borrowing, or to improve your eligibility for credit in the future, you’ll come out ahead when you pay it down faster.
Debt Consolidation with a Personal Loan
Using a personal loan to cover multiple debts by rolling them into one with a single monthly payment and interest rate is known as debt consolidation. It’s a strategy to paying off debt where you might find yourself paying less interest charges.
Often by using a Canadian personal loan for debt consolidation you may find your monthly payments to be less since you might get a lower interest rate. This can help you to pay off the balance faster, especially if you make extra payments and don’t have to worry about prepayment penalties. By paying off the loan faster, you can also save on interest charges as well. In the case of prepayment penalties, this is typically charged as a percentage (fixed fee) or sometimes as the amount of interest that a lender may have missed out on if you had paid off the loan early. Should you have some form of prepayment penalty, it can be worth comparing to what you might pay if you followed the scheduled payments versus paying early, penalties and all.
Strategies for Paying Off Debt
Paying more than the minimum on debt in Canada can get you closer to paying it off in less time, and even cost you less in interest. Just be sure to check whether additional fees or prepayment penalties may apply to your situation.
Start by paying your debt with the highest interest rate first. Not only does this decrease your overall debt, it can help you save on interest. Continue to pay down debt with the next highest interest rate. This is often referred to as the “avalanche method” of paying down debt, and while it may seem slower, it may save you more in the long run.
Alternatively, some prefer by starting with the smallest balance first and work their way up to the largest balance. This can help create a sense of accomplishment and be rewarding while also building momentum towards paying off balances and is known as the “snowball method” of paying down debt and can offer small wins as motivation.
While the avalanche method focuses on high interest first, if the balance owed is large, it may take some time to pay off debt and can be discouraging, making it difficult to stick to the plan. If you are the type that would be more concerned with seeing progress, you might prefer to use the snowball method for tackling debt.
Preparing to Pay Off
While it might seem like you should tackle those balances immediately, many experts suggest before trying to tackle your debt that you build an emergency fund first. This can provide a sort of safety net before you begin to pay down debt. By having an emergency fund in place, this can help prevent you for sliding backwards while paying down debt should a situation come up like an unexpected medical bill or car repairs.
Recommended: Ways for Dealing with Credit Card Debt
More Options to Pay Off Debt Faster
If you make some adjustments to your spending, you can further reduce your debt in less time. From spending less on eating out each week to developing more frugal habits is just a couple ways to get started.
You can also look at your bills such as subscriptions for streaming services and decide whether you can do without while you try to get your debt under control.
Sometimes calling your cable, internet, mobile or insurance provider about any discounts or opportunities to save is only a phone call away. Some people have been know to switch providers, knowing they’ll likely receive a call to try and win back their business by offering more favourable rates in the near future.
Another option if dealing with credit card debt is to look at balance transfer offers. Some credit cards can come with an introductory rate of 0%, but for a limited time, usually between 15 and 21 months. The balance transfer can allow you to pay off credit card debt without accumulating interest, as long as you pay it down before the introductory term ends. Also, you should know that sometimes there can be balance transfer fee, and this could be up to 6% of the amount you’re transferring. So it requires a little math, but can be another good option to paying down debt.
Should you come into any ‘extra’ cash, either from a raise or bonus at work or from selling some of your stuff this can also be a great way to help pay down some of that debt.
Learn More: How to Get Out of Debt Faster
While taking out a personal loan to consolidate your debt can have a small short term affect on your credit score, if you manage to make your payments on time you’ll reduce your debt to income ratio and likely have a better credit score later. Keeping your credit utilization under 30% is generally required to be approved for many credit products, but keeping it under 10% can benefit your score.
When in reducing debt mode, it’s important to not use credit if you want to make progress, or you might even wind up owing even more than when you started.
While you are not guaranteed a lower interest rate when taking out a personal loan, you owe it to yourself to explore the option. Even if you have a poor credit history and know your score would be low, if you carry debt with some high interest loans, consolidating your debt with a personal loan can still help you come out ahead. The only way to be sure is to look at what rates you pay now and find out what offers you could be eligible for to determine what you might save.
- Benefits of Obtaining a Personal Loan
- How to Get a Loan with Bad Credit
- Should I Get a Personal Loan?