Have you ever wondered how a debt consolidation loan could help you? Having more than one debt is common in Canadian households. And some people don’t just have multiple debts, but multiples of the same kinds of debt, namely credit cards.
Sometimes the competing demand for payments can be overwhelming and it can feel impossible to keep up with your payments. Debt consolidation is one solution that may make debt management easier and provide you with the debt help you need.
It doesn’t work for everyone though so here’s how to see if consolidating your credit card debt is a good idea, or if you need a more robust approach. Let’s look at what debt consolidation means practically first.
Consolidating debts is a process of bringing all your debts together into one debt. Instead of having multiple payments, you have one single loan with a single payment each month. Debt consolidation loans are offered by banks and a wide variety of lending companies, a not-for-profit credit counselling organization can also help put together a plan for debt consolidation. It’s best to research a trustworthy organization and a qualified counsellor.
Licensed Insolvency Trustees, like those at BDO, do not offer debt consolidation loans. An LIT though can discuss all forms of debt consolidation with you and help you learn how one might fit into your plan to eliminate your debt and manage your finances more easily.
As mentioned, the most obvious reason to consolidate your debts is to make repaying them easier. If you have debt on 2, 3, 4 or more credit cards consolidating them can make it much easier to keep track of the bills because you’ll only have one payment a month. Debt consolidation is meant to help create a more simplified payment plan.
Consolidating your credit card debt will likely also lower the interest rate on your debt as well, saving you some money in the long run. Debt consolidation loans typically have a much lower interest rate than that of the average credit card. While a credit card can have an interest rate around 20%, many debt consolidation loans have interest rates closer to 7.5%. This saves you money you would normally have to pay on credit card debt.
Consolidating your debts can in many cases lower your monthly payments, not only on interest but on the debt overall. A debt consolidation loan can spread your payments out over a much longer period of time than trying to keep up with your credit card balance each month. Having a longer period of repayment means your monthly payments can be lower because the debt is spread out over more time.
If know you can afford to pay the bills right now but struggle to make the payments on time and end up paying more on interest because of that, debt consolidation can help. Because there’s only one payment to make each month, you only need to remember to pay that one bill monthly. Debt consolidation provides a structured payment plan that is easier to manage and can help you avoid missed or late payments.
If you’re approved for a debt consolidation it can cause a dip in your credit score. If you make your payments on time and reduce your overall debt though, debt consolidation can help improve your credit score over time. As mentioned previously, you generally need good credit to start to qualify for debt consolidation.
If you continue to use the cards after consolidating your credit card debts, you may end up in a worse financial situation than before. Continuing to use credit cards, will add to your debt and you may end up with a higher balance than you had before consolidating your debt.
Debt consolidation is not a debt solution that works for everyone. There are more options out there though. Unlike debt consolidation, there are debt relief solutions that can reduce how much you must pay back overall.
Here’s some ways that actually can lower your overall debt repayments.
Do you know how much your debt will actually cost you? BDO’s Debt repayment calculator shows you how much you can owe with different debt relief programs.See what it will cost to repay your debt
Debt settlement companies can negotiate with your creditors to offer them a lump sum payment from you. This lump sum is often lower than your total debt. You must pay the lump sum if your creditors agree.
Be aware that debt settlement companies may use high pressure sales tactics to get you to agree to something you cannot actually afford. There is also no guarantee that all your creditors will agree to the debt settlement.
The Financial Consumer Agency of Canada has a handy guide for dealing with a debt settlement company.
A consumer proposal is a legal process under the Bankruptcy and Insolvency Act that can reduce your debt by up to 80%. It also stops debt collectors from contacting you. For a consumer proposal, you need a Licensed Insolvency Trustee to negotiate on your behalf with your creditors.
A consumer proposal is a great option if you are behind on your bills and don’t have good credit. Consumer proposals can also be tailored to meet your unique situation.
Only a Licensed Insolvency Trustee is legally allowed to do this process for you.
Bankruptcy is another legal process which protects you from your creditors. As part of that legal agreement, you may be forced to surrender assets, which would be sold to pay your creditor. Most people do keep their house while undergoing bankruptcy.
At the end of the bankruptcy process you are released entirely from your debts. As with a consumer proposal only a Licensed Insolvency Trustee can file a bankruptcy on your behalf.
While perhaps the most widely heard of solution to debt issues, bankruptcy is not a common solution. It’s considered to be the final option for debt relief and is only considered in extreme circumstances.
If you’re struggling with debt but don’t know what to do the best first step is to meet with a Licensed Insolvency Trustee. They can review your situation and lay out every debt relief option that is available to you. They’ll also show you the pros and cons of each one. The first consultation with a BDO Licensed Insolvency Trustee is completely free.