Debt consolidation is often one of the first options people consider when facing debt management decisions, especially for dealing with credit card debt. Many consumers aim for a consolidation to simplify monthly payments, and hopefully even lower the monthly cost of their debts. Unfortunately, there can be challenges in achieving a debt consolidation that really solves the problem – and there are potential pitfalls to be aware of.
What you don’t know can cost you – sometimes a lot. BC debt help specialist and Sands & Associates Licensed Insolvency Trustee Blair Mantin joined BT Vancouver to break down key considerations about debt consolidation that consumers should be aware of and give some tips for debt consolidation success.
Watch the clip here and read more below:
Debt Consolidation in BC
Although people often think that debt consolidation means getting a loan from a bank to pay off your individual credit cards and other debts, the first thing you should know about debt consolidation is:
- There’s More Than One Way to Consolidate Debt
If you’re seeking lender-based solutions there are multiple borrowing options for consolidation such as:
- Basic consolidation loans: A bank/credit union/finance company provides you the funds to pay off outstanding debts and merges that new balance into one big loan.
- Home equity consolidation loans: Drawing on your home equity (also sometimes referred to as ‘refinancing your mortgage’ or taking out a ‘second mortgage’).
- Balance transfers: Using a line of credit, overdraft or even another credit card to pay off debts.
One question people often ask is “Should I consolidate my credit card debt?” – and that depends a lot on how you plan to go about it! No two situations are exactly alike, and your personal situation, needs and goals will dictate how appropriate different types of consolidation might be for you – and the options you are able to access.
“…someone with $53,000 debt could actually have a light at the end of the tunnel…to pay it all off in 5 years, when I thought it would take me until I was maybe 65… I feel like a million bucks.”
– Meet Jessica, Hear her Story
Particularly if you’re in a position where you want to cut your payments down as much as possible, you should know that:
- You Can Consolidate Debt Without Borrowing
Many Canadians aren’t aware that there are options to consolidate their debts without needing to borrow. Non-borrowing consolidation options include:
- Credit Counselling Programs: Work with a credit counsellor to consolidate eligible debt. You will repay 100% of your debt (usually) without interest, plus the credit counsellors’ fees (even if they are a non-profit organization).
- Consumer Proposals: Work with a Licensed Insolvency Trustee to consolidate virtually all your debt and cut your repayment down to what you can afford. The unpaid balance will be written-off by your creditors and no interest will be charged on the debts you consolidate.
- This is the only consolidation option that can include balances for government debts such as taxes, student loans, etc.
- You’ll pay zero fees beyond paying back the portion of the debt you can afford – usually in the range of 30%-50% of the total outstanding balance.
If you are looking for the consolidation option with the least out-of-pocket cost and most affordable monthly payment then that’s normally going to be a Consumer Proposal. For example:
- You have unsecured debt totalling $20,000 that you want to consolidate:
- With a 12% interest rate a debt consolidation loan would mean monthly payments of approx. $665 over 3 years.
- In a Consumer Proposal, if you offered to repay 40% of the debt you could have monthly payments of around $220 over 3 years. (The $12,000 that is unpaid will be written-off by your creditors.)
This cost difference comes down to two main things: You are automatically not going to have to pay interest with a Consumer Proposal – and that you can actually reduce your debt down too.
- Tips for Debt Consolidation Success
- Research all your options before you sign anything
- Watch out for high-pressure sales tactics
- Be sure you can afford the payments you are agreeing to
- Make sure you clearly understand all the terms/agreements
- Limit your use of credit
- It can be very tempting to see credit cards at ‘zero’ and begin to start using them again.
- It is critical to stop using credit while paying off your consolidated debt. Continuing to rely on credit after consolidating often means you’ll find yourself back in the same place again – sometimes very quickly since you’ll also have the consolidation debt too.
- Be sure that you’ve addressed the issue that caused the debt in the first place
- When you choose to consolidate using a non-borrowing option like a Consumer Proposal you will be provided with an opportunity to gain some further insights into underlying issues or habits that can aggravate a debt cycle.
- Private one-on-one financial counselling sessions are held as part of your Consumer Proposal services, allowing you access to knowledge and resources around credit scores, improving spending, savings strategies and more.
Get your plan to be debt-free! Book your confidential free debt consultation and connect with a friendly Sands & Associates BC debt expert today.