Debt consolidation loans are a popular debt management option that many people consider when they want a solution to streamline balances from credit cards, overdrafts and other basic consumer debts. While consolidating debt can provide great benefits and help resolve several common debt management challenges, borrowing money isn’t always the best way to consolidate debt.
Read on to learn key considerations when it comes to debt consolidation, including options for both borrowing – and non-borrowing– consolidation solutions.
Lender-Based Debt Consolidation Options in BC
Debt consolidation with a bank follows a basic concept: You borrow a lump sum amount from one lender and use these borrowed funds to pay off multiple other debts. There’s more than one way to consolidate debt by borrowing – some common lender-based consolidation options may include:
- Debt consolidation loans
- Home equity loan (sometimes called a second mortgage or refinancing your mortgage)
- A line of credit or overdraft
- A balance transfer to a credit card
Regardless of how you consolidate, usually the intended advantages of debt consolidation are that you would:
- Have fewer monthly debt payments to juggle
- Free up monthly cash-flow and be able to save money in the long-term by refinancing your existing debts at a lower interest rate
- Get a clear timeline as to when your now-consolidated debts will be paid off
Unfortunately, and despite having many different product options, when you borrow money for consolidation the intended goal of eventually becoming debt free may be quite difficult to achieve.
Why Borrowing Money for Debt Consolidation Can Be a Problem
It’s common that people looking for a consolidation solution to deal with debt are confronted with the reality that solving their financial crunch is more of a challenge than their bank is willing to take on. Debt consolidation loans and other types of consolidation financing are often out of reach for consumers because of these three common factors:
- Debt Consolidation Financing is Difficult to Qualify For (Especially at Best Rates)
To qualify to borrow money for a consolidation option at an interest rate better than most credit cards and other consolidation-eligible debts, at minimum you can expect to need to prove you have stable income AND a high credit score.
- If you’re carrying a lot of debt in relation to your take-home pay, this alone can make favourable borrowing options difficult, if not impossible to qualify for.
Another challenge with borrowing is that lenders want assurance they’ll recover their money – it’s rare to get consolidation loans otherwise – and this is commonly done with guarantees by:
- A co-signer / co-borrower. This person will be responsible for 100% of the unpaid balance in the event you don’t meet all repayment terms.
- Many loans also allow a lender to request full payment of the remaining loan balance immediately from the co-signer if they are called on to cover missed payments. This is often known as an ‘acceleration clause’.
- An asset. The lender may put a lien on a major asset such as your vehicle or your home equity. You then risk losing your home or other asset pledged if you default on your payments.
Not all lenders are going to offer great (or even good) borrowing terms. Be especially careful looking for lenders online. There are many organizations that make money as ‘lead generators’; selling your information to actual lenders, attempting to charge you to borrow money and other predatory “business” practices.
Credit Score Concerns: Sometimes people struggling to mange debt worry about temporarily “losing” a good credit score by using legal debt solutions. For virtually everyone, being debt-free is in your best interest – and if your debt is a nuisance, you will benefit more from getting out of debt than maintaining a credit score high enough to borrow more. Learn more about mistakes not to make in managing debt and credit ratings.
If you qualify for any borrowing, you should be certain you can consistently manage the repayment terms for the entire time needed to pay the debt off. Don’t assume that since a debt consolidator is offering you a loan that it’s the best option to pay off your debt, or that you can afford it.
- Monthly Debt Consolidation Payments and Costs of Borrowing Can be Expensive
Interest rates offered can vary hugely and are sometimes very high (especially with sub-prime lenders). We’ve seen numerous examples where the cost of interest charges and/or monthly and miscellaneous fees can make for a monthly payment that’s even higher than your original payments.
- Factor in the monthly AND total costs of borrowing before you move forward with any type of consolidation.
- Don’t forget to consider any creditors that will need to be paid outside of any consolidation financing you can qualify for. (Canada Revenue Agency for example).
- If you’re using a credit card balance transfer to consolidate credit card debts watch out for promotional rates that may expire.
Be aware that you might simply have too much debt to pay off using a loan or informal type of debt repayment plan, since neither of these options allow you to cut your debt – or even manage all types of creditors. One quick way to get some direction on the best type of consolidation for you is to do the “Rule of 60” math:
- Add up your total non-mortgage debts, then divide by 60. (i.e. $25,000 / 60 = $416)
- Is that number (i.e. $416) an affordable monthly payment for you over the next 60 months?
If you need (or want) to lower your monthly payment to get to debt-free in five years (60 months), consider a Consumer Proposal as a non-borrowing consolidation alternative. As we’ll discuss, this unique legal debt solution could give you your best debt consolidation option, combining (non-borrowing) consolidation and debt negotiation – and a Consumer Proposal is often used as a solution to consolidation financing that has become unmanageable.
- Consolidation Financing Can Take a Long Time to Pay Off
You may find yourself paying off your consolidation for a long time – three, five, seven, even up to 25 years depending on the lending terms you’ve been offered. A lot can happen in just a few short years and having long-term debt beyond five years can leave your future self seriously strained.
- Avoid taking on more debt or continuing to use credit while you’re paying off money you borrowed for your consolidation, otherwise debts can accumulate to where you may not be able to afford all your payments.
- Also avoid the temptation of borrowing more than you need for consolidating.
- If you’ve used a line of credit to consolidate debt, be aware that without a set repayment requirement you may need a lot of self-discipline to make substantial payments beyond the minimum required amount.
The bottom line is that consolidation loans and financing simply change who you owe money to. At best you get a lower interest rate and a more “affordable” payment – less than that, you may struggle to pay it all off and even risk the creditor’s recourse to your asset or co-signer.
Many debt professionals say it’s hardly ever a good idea to co-sign debt with someone else – here’s why.
It is possible to solve a debt problem without taking on more debt – and depending on the non-borrowing consolidation option you choose you can avoid added service fees, miscellaneous costs and other risks.
BC Debt Consolidation Options That Don’t Require Borrowing (or a Good Credit Score)
If you’re a BC resident here are two other ways you can consolidate your debt without needing to borrow money. Since one is an informal option and the other a legal solution, there are some key differences between these two approaches – both however will not require you to hold a high credit score, nor require you to take on more debt to qualify.
Credit Counselling Debt Management Plans
Working with a credit counsellor your eligible debts will be consolidated and managed under one plan and repaid with one (usually) monthly payment. With credit counselling consolidation no borrowing is required and you:
- Must pay back 100% of the debt you consolidate in your credit counselling plan.
- Your credit counsellor can often negotiate to stop ongoing interest charges.
- Pay fees to the creditor counsellor for using their services / program plan.
- Credit counselling organizations may provide resources at no cost, but debt management programs have fees, sometimes on a sliding scale.
- No credit counselling is free – both non-profit and for-profit credit counsellors charge various fees.
As well as the added debt consolidator / credit counsellor’s costs, there are some other potential drawbacks to credit counselling debt management plans to be aware of and consider.
Common Problems with Credit Counselling Consolidation
Even though you’re streamlining your debts and getting a break on interest, informal debt management plans can still leave you struggling with expensive monthly payments and too few benefits. Be sure you understand the process and costs in detail, and are aware of all limitations:
- Not all creditors will work with credit counsellors, and credit counsellors don’t have any legal power to enforce negotiations or prevent creditors from withdrawing from the plan and pursuing you if you miss a payment.
- Credit counselling is not a federally regulated industry or profession, so your recourse should there be any issues or conflict with your provider may be minimal. Take time to carefully research any organization you consider hiring to help you.
- Besides working with a Licensed Insolvency Trustee on a legal debt solution (such as a Consumer Proposal, Division I Proposal, or bankruptcy) there is no such thing as a government-approved or affiliated debt management or forgiveness program.
- Learn more and compare key differences in non-borrowing debt solutions – Consumer Proposals VS Credit Counselling.
For those who want a cost-effective solution to pay off their debt in a manageable timeframe, filing a Consumer Proposal is often the best way to consolidate debt. A Consumer Proposal allows you to consolidate virtually all types of debt interest-free AND cut the balance down to what you can afford to repay. You’ll work with a Licensed Insolvency Trustee who will coordinate the plan and payments, and creditors will agree to write-off the unpaid balance.
Consumer Proposal Debt Consolidation
Consumer Proposals are a unique solution that offer great advantages over other consolidation options. Like a consolidation loan you’ll only make one simple (usually monthly) payment, but you won’t be borrowing money or paying interest charges, and unlike credit counselling plans you’re not charged added professional or program fees.
Not only that but with a Consumer Proposal the amount of debt you have can be cut and forgiven, and how long your payments last are based on your personal circumstances but will never extend beyond 60 months. For example:
- Your total consolidated debt could be cut by up to 50-80%
- You might propose a one-time lump-sum payment, or make monthly payments for up to 60 months
Doing a Consumer Proposal you’ll get a transparent legal process with built-in consumer safeguards and resources, including:
- Generally the lowest monthly payment of all consolidation options available
- Automatic protection from your creditors (even government creditors like Canada Revenue Agency)
- One-on-one financial counselling with a qualified counsellor
Consumer Warning About Debt Proposals
Advertisements from debt settlement agencies and out of province debt consolidators and poolers can be misleading. It’s important to know that you do not need a referral to work with a Licensed Insolvency Trustee, and only a Licensed Insolvency Trustee can help you do a Consumer Proposal.
The best approach is to connect directly with a Licensed Insolvency Trustee based in and local to your province. In an hour or less we can discuss your situation together, your overall needs and goals and calculate a Consumer Proposal that would be ideal for you.
- There’s no obligation to commit to moving forward working together
- There is no cost to discuss all your options, including but not limited to Consumer Proposals
- Consultations are private and confidential, and may be done in-person or virtually
Over the years Sands & Associates has worked with tens of thousands of people in BC and we are proud to offer debt help with a supportive approach. We welcome you to a non-judgmental space to ask questions, learn about debt options and resources, and take charge of your debt feeling empowered and well-informed.
Learn more about Consumer Proposals, debt consolidation and other options to deal with debt in BC. Sands & Associates’ friendly team have “Debt Smart with Heart” and full services are available in-person or remotely. Book your free confidential debt consultation now.