What Is The Smartest Way To Consolidate Debt?

Here’s an idea worth considering. Since there is more than one way to consolidate your debt, shouldn’t you be doing it the smartest way possible? Settling for less or buying into a slick advertisement that you will be paying the bill for isn’t good enough. Let’s prove you made the smart move.

All The Ways To Consolidate Debt

There are so many options towards consolidating debt. 

  1. Personal Loan – Typically these loans are offered by the banks and credit unions and can consolidate your debt into the lowest interest rates available today. Excellent credit is required.
  2. Credit Card Balance Transfer – Another way to amalgamate your debts is to take them from a high interest credit card to a lower one. Sometimes a 0% interest rate is offered for a limited time to help you save interest costs so you can put more towards paying off the debt.
  3. Cash out investments – If you have RSPs or a cash value life insurance policy, you can cash out some of the value towards paying off high interest debt. Tax implications may apply.
  4. Debt Consolidation Loan – If you have multiple debts equalling an amount that typically can’t be paid off in a reasonable amount of time (five years is the benchmark), you can take out a new loan to pay off the other higher interest debts.
  5. Mortgage Refinance – Looking towards your existing mortgage, it may be advantageous in the long run to add your unsecured debts to the mortgage at much lower rates and then aggressively pay this off to reduce the amount of interest over time.

Read more about all the things you need to know about Debt Consolidation Loans.

Is This A Smart Debt Consolidation Option?

For our purposes we are going to focus on Debt Consolidation Loans today. So you have burgeoning debt and it feels like the pressure is on to make a move. The slick advertising campaigns on the radio and the billboards are plaguing your sleep. Is this the smartest way to consolidate my debt?

There is a tool I have come up with over the years in order to determine whether a loan is a good option for my clients. I call it the ‘Smart Move Test’ and what we are determining is if taking this Debt Consolidation Loan will lower your effective borrowing rate.

Quick example: You have two maxed out credit cards at 19% interest, a fully used line of credit at 12% and a smaller car loan at 6%. You’ve approached one of the big advertisers for a Debt Consolidation Loan and they’ve offered you an unsecured loan at 13% with a lower monthly payment. 

Does this pass the ‘Smart Move Test’? The answer is NO! After looking at all the interest costs and the non interest costs in order to assist in this example, the effective borrowing rate would be 15.5%. 

The reason this is not a smart move is that your existing effective borrowing rate for these debts is 14.5% so even though you are getting a lower monthly payment you are still going backwards.

 Smart Debt Consolidation Loan

So what’s at stake when considering your options towards the smartest way to consolidate debt? Paying for the big advertiser’s bottom line? Uh-un 

If you want to look into all your options, find a Mortgage Agent that works for you and doesn’t have all the overhead to pass on in the cost of the loan. I work on a purely referral basis so you will never hear my name on a radio station or see my face on a billboard. Keeping the cost down is my prerogative.

So you’ve made your move. We found the smartest way to consolidate your debt and time has proved this to your loved ones. High five! Let’s go make this a reality by contacting me today.