Debt consolidation can make it easier for you to pay off your debt, and there are several different types of debt consolidation you might consider. Read on to learn about one of the best ways consumers can consolidate AND cut their debt without paying interest charges or fees, and learn about the pros, cons – and costs – of other common options for debt consolidation.
How Can Consolidation Help Me Manage Debt?
If you’re dealing with multiple debts, there can be good reason to manage your repayment with debt consolidation. Depending on the solution you choose, debt consolidation benefits may include:
- Organizing several different debt payments into one simple monthly payment
- Taking the guesswork out of calculating monthly payment amounts
- Lowering your total monthly debt payment
- Discounting the cost of borrowing by reducing (or eliminating) the interest charges on your debt
- Cutting the amount of debt you must pay back to settle your accounts in full
- Setting a clear schedule for when you can expect to have your debts paid off
It’s important to understand the options and choose the debt consolidation option that’s right for you.
Top Choice for Debt Consolidation – Consumer Proposals
With few qualifiers and no borrowing costs or added fees, a Consumer Proposal is one of the best ways to consolidate debt. A Consumer Proposal allows you to consolidate and cut virtually all debts (including tax and other government debts), repaying the portion you can afford with a simple monthly payment.
Try the ‘Rule of 60’ Math: Add up your total non-mortgage debts and divide by 60. The result gives you a no-interest monthly debt payment for the next 60 months (five years). Now what if you could take that payment and cut it by 50% – or even up to 80%?
That type of interest-free debt reduction is possible with a Consumer Proposal debt consolidation, a flexible legal option that can be tailored to suit just about every situation. You’ll offer to repay the amount of debt you can afford, and your creditors will agree to write-off the unpaid balance in full settlement of your accounts.
- There is no borrowing for a Consumer Proposal, eliminating the need for a credit check qualifier.
- In addition to reducing your balances, you’ll ‘freeze’ your debt, eliminating ongoing interest charges, and have a legal safeguard to protect yourself from creditors.
- You can even stop actions like a wage garnishment or bank account seizure.
- A Licensed Insolvency Trustee will deal with your creditors on your behalf and work with you throughout your Consumer Proposal.
- No service fees are added to your monthly payments (Trustees have tariff-based fees paid from the money your creditors get).
- You’ll have up to 60 months to complete your Consumer Proposal and have the option to pay it off early any time without penalty.
Consumer Proposals offer a unique alternative to bank loans, allowing you to consolidate your debt with substantially less cost, and avoid debt repayment turning into a long-term expense.
Consolidation Loans and Financing Options – Pros and Cons to Consider
If you’re investigating how to consolidate your debt with a bank or other lender you might consider one of these borrowing options:
- A basic personal loan to pay off multiple balances and roll your debt into one new loan with a fixed payment schedule.
- A line of credit used to cover different debts that you’ll repay over time (with a minimum monthly payment required to keep the account up to date).
- A home equity loan or line of credit that functions like a second mortgage.
Bank-based debt consolidation products do not reduce your total debt but may offer some convenience if:
- Your new payment and payment terms are affordable and free up room in your budget each month
- The new interest rate is lower than the rate(s) you’ve been paying on your various debts
There are drawbacks to be aware of though when it comes to using more credit as a debt solution…
- The cost of borrowing matters! Understand that with loans and financing options:
- If your loan or line of credit has a variable interest rate, your monthly payments will go up as interest rates increase.
- The longer the borrowing term, the more your debt will cost you. Some people get stuck between a rock and a hard place choosing between a longer term that has lower monthly payments and a shorter term (less interest costs) with higher monthly payments.
- Successfully paying off consolidation financing can be challenging:
- If you consolidate with a product that has a flexible repayment schedule you need to ensure you are paying down your balance. If you don’t have the budget or discipline to pay substantially more than minimum monthly payments on a line of credit you may stall and then rack up interest charges.
- Don’t take on financing that you can’t afford, and don’t be tempted to incur more credit than you need or to keep using other credit accounts. Any of these just lead you further into debt.
- Consolidation loans at ‘best rates’ are often difficult (if not impossible) to qualify for:
- If you do qualify, you’ll likely still be asked to offer a major asset as collateral or bring in a co-signer. Both mean you are taking a significant risk if you have any difficulty keeping up with payments.
- It’s not uncommon for people to discover that even with a good credit score, the amount of debt they have makes them ineligible for consolidation financing through mainstream lenders.
If you don’t qualify for a consolidation loan at ‘best rates’ or are concerned about being able to afford the payments, you still have non-borrowing consolidation options to consider. Remember, a Consumer Proposal does not require any borrowing, and your credit history is not a qualifying factor.
Denied for a Debt Consolidation Loan?
Sometimes after being turned down for a consolidation loan with their primary bank, people consider accepting financing from a sub-prime lender, or even working with a debt negotiator. Be extremely cautious in these areas of debt restructuring and know that advertisements may be misleading:
- There are companies that engage in predatory business practices, making money as ‘lead generators’ by selling your information to high-cost lenders, adding on borrowing fees, and more.
- Don’t allow yourself to be pushed into a high-interest loan, swayed by claims of ‘credit repair’ or guarantees of automatic debt reduction.
- The only things that can improve your credit score are time and demonstrating responsible credit use.
- Anyone can call themselves a ‘credit counsellor’ and offer you various debt services.
Licensed Insolvency Trustees are the only government-qualified and endorsed debt help professionals in Canada, and the only specialists authorized to provide Consumer Proposals and other legal debt relief solutions. If you’re unsure simply ask “Are you a Licensed Insolvency Trustee?”.
- You do not need a referral to speak with a Licensed Insolvency Trustee and you should never pay money to be connected with a Licensed Insolvency Trustee.
- At Sands & Associates debt consultations with our Licensed Insolvency Trustees and qualified Insolvency Estate Managers are always free, confidential, and without judgment.
Some credit counsellors have a working relationship with major banks and can use this to negotiate a debt repayment plan for you, but credit counsellors and other agents have no legal power and can neither compel creditors to work with them, nor prevent your creditors from pursuing you with collection or court action if you stop making your payments. It’s also important to know that:
- Credit counsellors may promote their plans over other consolidation or legal options you have because they receive money from creditors, getting a percentage of the debt they recover.
- Credit counsellors don’t have to have any specific training, so always do your research to ensure you’re dealing with a reputable organization.
Credit Counselling Plans – Pros and Cons to Consider
Credit counselling plans offer an alternative to consolidate certain debts without borrowing, and for debts that are eligible for a credit counselling plan, a credit counsellor may be able to negotiate a reduction in the interest rate, or an interest-freeze.
Consolidating with a low-interest or interest-free credit counselling repayment plan may work if you:
- Owe a relatively small amount of debt (less than $10,000)
- Have only basic unsecured debts such as credit cards, unsecured loans, or lines of credit (i.e., no amounts owing to Government bodies)
- Can afford to repay all your debt plus the plan’s fees within 5 years
Credit counselling may not be appropriate for consolidating your debt if:
- You have a lot of debt, or your debt-to-income ratio is unfavourable
- You owe any money to creditors who will not work with a credit counsellor (this includes Canada Revenue Agency, student loans, ICBC)
- You want the safety of a secure legal option
Other important considerations:
- Be certain you understand which debts would be covered by your credit counselling plan, how much you are being charged in fees, and whether you can consistently afford the payments.
- Lower (or no) interest consolidation cuts your debt costs, but credit counsellors charge fees for their services (even non-profit agencies), so you need to be sure your plan will actually save you money.
- Compare the credit counsellor’s fees with what you will save in interest. In some cases, the agency fees could be more than you’d save.
If you want or need a lower your monthly payment you will usually be best off to make a Consumer Proposal to consolidate your debt for substantial savings.
Compare Monthly Debt Consolidation Payments
The cost difference between varying interest rates and the time it takes you to repay your debt can be considerable. In this example we compare options to pay off credit card debt totalling $25,000 in the next three to five years:
Option 1: Repay $25,000 debt at an 18% interest rate, without any consolidation:
- With 60 monthly payments of approx. $630, the interest paid would total just over $13,000.
Option 2: Consolidate $25,000 of debt borrowing at an interest rate of 12%:
- With 60 monthly payments of approx. $555, the total interest paid would be near $8,400.
- With 36 monthly payments of approx. $830, total interest paid would be just under $4,900.
Option 3: Consolidate $25,000 in a credit counselling plan, with zero interest:
- With monthly payments of $415 + program and service fees, debts would be cleared in 60 months.
- With monthly payments of $700 + program and service fees, debts would be cleared in 36 months.
Option 4: Consolidate and cut debt (by 70%) down to $7,500 with a Consumer Proposal, with zero interest or added fees:
- With monthly payments of $125 total, debts would be cleared in 60 months.
- With monthly payments of $210 total, debts would be cleared in 36 months.
Free Confidential Debt Advice
To explore all your options for debt management, including consolidation, Consumer Proposals, debt relief and forgiveness solutions, connect with a Licensed Insolvency Trustee for a free confidential consultation.
Sands & Associates serves residents across BC, and we offer our full suite of services online and in-person from local offices across the province. We believe our open and non-judgmental approach to debt help offers our clients a positive and empowering experience, with support to achieve their debt-free goals and live life without the stress of debt.
Book your free confidential debt consultation with Sands & Associates today. Your debt-free future could be closer than you think.