Should You Get a Consolidation Loan to Pay Off Your Reno Debt?Jul 21, 2017
According to a BDO Canada poll, almost 60 per cent of Canadian homeowners are planning to spend money on home renovations this year. On average, renovators are planning to spend almost $16,500. For some, that could amount to a lot of debt. So how could they go about paying it off?
Debt consolidation is one way to combine multiple forms and lines of debt into one loan. It’s particularly useful if you have several debts with high interest rates—like credit cards charging 18 or 19 per cent. Debt consolidation can help you get out of debt by combining all of your monthly payments into one, with a much lower interest rate than your credit cards.
Why would I want a lower interest rate?
All loans, whether in the form of credit cards, payday loans, bank loans or lines of credit, come with an interest rate attached. Unless you can pay your debt off in full every month, interest will be added to your debt, and you’ll have to spend more to pay it off. That money could be going toward other financial goals, like an emergency fund or retirement savings.
Interest rates can vary widely across different types of loans and lenders. Lines of credit will carry much lower interest rates than credit cards or payday loans, which charge some of the highest rates you’ll find (as much as 400 per cent a year). If you do have payday loans, it would be a good idea to consolidate them instead of taking out more.
Recent reports suggest that most in-debt Canadians would have a difficult time managing their debt if interest rates increased by one full percentage point. Although this wouldn’t affect your credit card debt, anything you can do to lower the interest you’ll pay can help you pay off debt sooner.
Your best bet? Avoid taking on more debt
If you’re considering a home renovation this year, it’s in your best interest to spend conservatively, and cover as much of the costs as you can with cash or savings. Carrying large debts from month to month means paying more interest, and potentially not being able to manage your debt if your circumstances change.
That’s why you shouldn’t go into a renovation thinking that you could probably manage your debt by getting a consolidation loan after the fact. It’s best to create a renovation budget and build a reno savings fund to avoid debt in the first place.
If 2017 is the year of renovations for your household, make the process as enjoyable as possible by planning ahead. Learn about savings methods that can help build up your reno fund by reading this blog post.
Do you have a plan to pay down debt? Tell us on Twitter. #DebtSolutions #HomeReno