Consolidating your debt can help you streamline your debt payments and ultimately pay off your debts faster – but there are different types of debt consolidation, and pros, cons, and considerations for consumers to be aware of. Read on to learn the ins and outs of debt consolidation, and discover one of the best ways Canadians can consolidate debt.
How To Consolidate Your Debt
Debt consolidation works by combining multiple different debts that you have into one new balance, and consolidating your debt can be a strategy to consider if you want to:
- Simplify your monthly payments.
- Reduce your interest charges and/or monthly payments.
- Establish a clear repayment schedule.
- Pay down your debt faster.
There are different ways to do debt consolidation. If you’re working with a lender, you could potentially consolidate your debt through a borrowing option such as:
- A new loan that’s used to pay off your existing debts, which you’ll repay over a set term.
- A balance transfer where you move your credit card balances onto one new credit card account, and you’ll manage your own monthly payments to pay off the new total.
- A new personal line of credit, which you’ll pay back through payments you manage.
- A new home equity line of credit or second mortgage, where you may make set payments to pay the balance off – or make minimum interest-only payments.
A Better Way to Consolidate Your Debt
Although you might consider options through a lender, consumers do have an alternative consolidation option that requires no further borrowing – this is called a Consumer Proposal. Here’s how it works:
- A Consumer Proposal will consolidate virtually all your debts (including general consumer debts, personal debts, and government debts) into one repayment plan, and you’ll offer your creditors the portion of your debt you can afford to pay back over a period of up to five years.
- Your balances will automatically be frozen, and no further interest charges will be added.
- Your creditors will agree to forgive the unpaid balance (which can often reduce your total debt anywhere from 50-80% or more).
- You’ll work with a Licensed Insolvency Trustee who will deal with communications with your creditors, collect and distribute your payments, and manage the whole Consumer Proposal.
What Are the Benefits of Debt Consolidation?
Because there are borrowing and non-borrowing options for debt consolidation, the potential benefits to consolidating your debt will ultimately depend on the type of debt consolidation you choose.
If you’re using a lender to consolidate your debt with a loan or similar option, aim for a financial agreement that offers you advantages that include:
- One simple affordable monthly payment that is smaller than your current monthly payments combined, making your finances easier to manage.
- Paying back your consolidated debt at a lower interest rate than you currently have, and with a repayment term short enough that you’ll save money on the total cost to repay your debt.
- A debt repayment schedule that allows you to clearly plan for when your debt will be paid off.
Added Benefits of Choosing a Consumer Proposal for Debt Consolidation
If you decide to make a Consumer Proposal you could get even more advantages from your debt consolidation, in addition to the benefits of a consolidation loan, including:
- A flexible and customized monthly payment, or other payment terms.
- Paying back only an affordable portion, often as little as 20-50%, of your total debt, in full settlement of your account balances.
- Because most people cut their debt AND don’t pay new interest charges, monthly Consumer Proposal payments are almost always substantially lower than those of consolidation loans.
- Professional support throughout the process, including financial counselling services are all available to you at no added cost or fee.
- Creditors will be directed to communicate with your Licensed Insolvency Trustee, removing stress or anxiety you may have about speaking with creditors.
- With no upfront cost to get started with a Consumer Proposal you’ll notice an immediate improvement in / boost to your monthly budget and personal finances.
What Are the Downsides of Debt Consolidation?
If you are considering consolidating your debt by borrowing with a lender, there are several possible ‘cons’ to be aware of, including:
- Qualifying for bank-based debt consolidation can be difficult – both in terms being approved to borrow at all, and for borrowing at ‘best’ rates.
- Lenders may require you to have a co-signer who will be responsible for repaying the full unpaid balance if you default on your payments, or they may require you to use a major asset as collateral against your loan. Both types of ‘guarantees’ can be highly risky, especially if you’re already struggling to pay down your debts.
- You may not be able to borrow enough to cover all your existing debts, which can mean still having to manage multiple debt payments and accounts.
- Long repayment terms can end up costing you more in accrued interest, and there can be even more borrowing costs and fees if you work with a ‘subprime’ lender.
- If you borrow at a variable interest rate, you’ll be immediately impacted by Bank of Canada interest rate hikes.
- You may find yourself stuck in a borrow-repay-borrow cycle if you don’t stop using your credit.
- If there are underlying financial issues that you haven’t addressed and you still have access to use your credit accounts, you may end up dealing with an unmanageable debt load again very quickly!
- Using a line of credit or credit card balance transfer to consolidate your debt can be risky if you’re not able to strictly manage (or afford) your debt payments, since as you pay back your balances the credit will again be available to be used.
Avoid the temptation to borrow more than you need to consolidate your existing debts – and consider closing the accounts you’re paying off, so you’re not tempted to use them.
Avoid Possible ‘Cons’ of Debt Consolidation with a Consumer Proposal
One way to safely avoid many of the potential downsides of debt consolidation is by using a Consumer Proposal to consolidate your debt, rather than relying on refinancing. With a Consumer Proposal:
- You’re not borrowing or paying any interest while you pay off your debt (which will be reduced too).
- Your credit score and history are not qualifying factors.
- You retain control and possession of your assets and don’t need a co-signer.
- You can start fresh and get a new credit card to keep the convenience, but ensure the limit is low enough that it won’t become unmanageable – or better yet, consider a secured or prepaid card!
- You have a clear plan tailored to your situation, and your Consumer Proposal payments won’t go past 60 months.
- Your creditors cannot change their minds, opt-out, or change the terms once your Consumer Proposal has been agreed to.
- You can pay off your Consumer Proposal early at any time, without penalty.
Can I Afford Debt Consolidation?
It’s very important to make sure you can manage the monthly payments required to effectively pay off your debt consolidation. Understand that a lender being willing to grant you credit doesn’t mean you can truly afford it…
As a quick check, try the ‘Rule of 60’ math:
- Add up your total (unsecured) debts and divide that total by 60.
- Is the resulting number a monthly payment you can consistently afford, to pay off your debts in the next 60 months (five years)?
If the affordability is doubtful – or you simply want to make your monthly payment lower – again, consider a Consumer Proposal as an ideal debt consolidation option. The difference in monthly payments and interest savings over the time it takes you to pay off your debt can be substantial.
Debt Consolidation Loan Payments VS Consumer Proposal Payments
Here’s an example to compare the difference of consolidating your debt with a consolidation loan versus consolidating and cutting your debt with a Consumer Proposal:
- To pay off a $20,000 debt consolidation loan in five years with a 12% interest rate, you would need to pay $445 per month – and your total interest costs would be roughly $6,700 over the five-year term.
- If you instead made a Consumer Proposal that offered to repay 30% of your total debt ($20,000 cut down to $6,000) over a period of 60 months (five years), that would require you to pay $100 per month – with no added interest costs or professional fees.
Get Help Assessing Debt Consolidation and Other Options
Whether you’re interested in how you can consolidate your debt, experiencing problems making your monthly payments, or hoping to get a plan to pay off your debt for good – the best thing to do is connect with a Licensed Insolvency Trustee local to your community so you can assess your situation together with a trusted professional.
- Licensed Insolvency Trustees are Canada’s only designated debt help professionals, fully qualified to safely provide you professional advice about your debt and debt solutions available to Canadians.
- All Licensed Insolvency Trustees offer a free one-hour consultation, and there is no referral necessary to connect – simply reach out directly.
Sands & Associates serves all of BC and can offer you our full suite of debt help and supportive services online, over the phone, or in person at the local office nearest you. When you speak with one of our debt help experts you can expect that:
- You will be treated with respect and dignity.
- We will take time to understand your unique situation, your concerns, goals, and needs.
- You’ll be provided information about all your options to deal with your debt, from consolidation to Consumer Proposals, bankruptcy to credit counselling and more.
It is our goal that by the end of your consultation you’ll come away confident, with a better understanding of your situation and options, with clear next steps in the debt solution you choose.
We understand it might feel uncomfortable to talk about your debt and financial challenges you might be experiencing, but please know that we are not here to judge you, your circumstances, or what has brought you to us. You owe it to yourself to get debt help, and we’re here for you with support and solutions that work. You could have your debt paid off years sooner than you think!
Get non-judgmental debt advice and a plan to be debt-free. Book your free, confidential debt consultation today.