Having more than one debt is common in Canadian households. Many people manage multiple debts from credit cards, lines of credit, student loans, vehicle loans and even payday loans. 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.
Consolidating debts is a process of bringing all your debts together into one debt, offered by a bank or financial institution or company. While a Licensed Insolvency Trustee (LIT) does not offer debt consolidation loans, an LIT will explain all forms of debt consolidation with you and discuss how one might fit into your plan to eliminate your debt and manage your finances more easily. Typically, people choose debt consolidation to simplify their payments and reduce interest charges from high interest debt like credit card debt.
If you’ve ever had credit card debt, you know the interest rates can be high. You can end up paying as much as 19 per cent interest (or more) on your unpaid balance, which can get very expensive, very quickly. Because a greater portion of your monthly payment goes towards interest charges, high interest debts can be more difficult to pay off and can generate additional debt problems.
Lenders usually offer a lower interest rate on a debt consolidation loan which can make paying off your total debt less demanding on your budget. If your goal is to be debt-free sooner, a debt consolidation loan may also allow you to make payments directly toward your principal.
Making a single monthly payment vs multiple credit card payments is not only more efficient, it’s easier to remember. You’re less likely to miss payment dates, which means you can avoid late payment penalties and the resulting blow to your credit score.
Debt consolidation is an overarching term that really includes different consolidation methods and options, and may be offered by different types of lenders. They include:
Offered by banks and financial institutions or companies. If approved, they will combine your unsecured debts (think unsecured lines of credit, credit cards, and payday loans, as opposed to secured debts like car loans or mortgages) into one loan with one interest rate. The approval may require you to have good credit.
Much like a debt consolidation loan, but offered by a credit counselling agency, which will offer to set up a program for repayment and negotiate with your creditors. Unsecured debts can be combined into one debt with one payment set low enough for you to manage each month (as determined by a credit counsellor). You’ll likely pay less interest, but you’ll still be responsible for repaying 100 per cent of your debt. A debt management program is not legally binding and the process can take several years to complete.
Banks and financial institutions and companies can offer you a line of credit or loan. A home equity loan is “secured” by the value of your home, usually equal to 80-85 per cent of the equity in your home. A home equity loan is similar to a regular mortgage in that you pay off the loan over a fixed term. If you can’t repay, you could lose your home in a foreclosure.
Offered by banks, a line of credit can be used to pay off multiple debts, or a single higher interest debt. Lines of credit tend to have lower interest than a credit card, sometimes around eight to 10 per cent. While the interest rate is much lower than most credit cards, interest on lines of credit is usually variable, which means it will change based on the prime rate of the bank.
Offered by a credit card company, this option allows you to transfer all the debt owed on multiple credit cards onto one card, at a lower rate of interest. But beware, there will likely be conditions. For example, the low interest rate might only be valid for a short period and then it will spike to a higher interest. Or the deal might come with fees, like an annual fee or even a percentage of what you owe.
To repay any type of consolidated loan you’ll need to have a clear financial plan and maintain a budget to manage your spending and accommodate the payment.
Banks will often look at a number of considerations before approving you for a consolidation loan. They consider if you and your debt are “good risks”, that is, whether your credit score is good enough, whether you are considered to have a high net worth, and if you have collateral or a co-signer who can carry the risk of you defaulting. If you have a history of missed or late payments, your credit score or credit rating may have been negatively impacted. That can make the approval process a bit more difficult.
If you suspect you aren’t a good candidate to consolidate your debt or you’ve been denied approval for a debt consolidation loan by a lender, learn about your other options before taking action on your own. Many people are intimidated or even embarrassed by the idea of speaking to a Licensed Insolvency Trustee about a consumer proposal or bankruptcy. But, did you know that a consumer proposal is a type of debt consolidation too?
In order to file a consumer proposal, you must meet with a Licensed Insolvency Trustee (LIT). During an initial free consultation, the LIT will review your finances and your debts and explain the different options for debt relief. If you choose a consumer proposal, the LIT will negotiate a legal, binding agreement with your unsecured creditors that allows you to repay a fraction of what you owe and keep your assets. Once your proposal is approved, you will make one monthly payment that is manageable with your financial situation. You pay no additional interest charges and your creditors must stop all legal action against you, including wage garnishments and collection calls. As part of the consumer proposal process, you must also attend two mandatory debt counselling sessions. While a consumer proposal and bankruptcy will impact your credit score for a time, they are the only debt forgiveness plans authorized by the federal government. Both options can help you restructure your finances and start fresh.
High living costs, an uncertain job market and growing debt loads have stretched household finances to their limit and beyond for millions of Canadians, making it difficult for them to attain their financial goals. There are many debt solutions that can help you reduce your debt and live more comfortably. It’s important to learn about all available debt solutions before choosing one that suits your situation. A debt consolidation loan is a viable option to get out of debt for many, and may be for you too.
Does consolidation sound like a good option for your debt? Speak with a Licensed Insolvency Trustee to begin the process of debt relief for a brighter financial future.
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