A GUIDE TO DECIDING WHAT DEBT CONSOLIDATION PATH IS RIGHT FOR YOU

If high-interest debt is catching up with you, Kevin Thatcher & Associates knows how to help. Debt consolidation may be a great option for getting back on track and avoiding filing for bankruptcy.

If you recognize any of these signs of financial insecurity then you should explore debt consolidation as a path to your debt-free life:   

• Are you often late on making your monthly payments or playing catch-up on payments for months prior?
• When you do pay your credit card bill, you are only able to pay the bare minimum amount? (This is something the big banks love as it means you will pay more in interest. Check your credit card bill it will tell you how long it will take to pay it off – you may be shocked!)
• Are basic day-to-day expenses such as groceries and gas paid for using credit cards, not cash?
• Do you find that more than 20 percent of each pay cheque ends up being used to pay down debt?
• Do you take money from one creditor to pay another?

WHAT IS DEBT CONSOLIDATION?

Debt consolidation is when a person combines several outstanding debts into one monthly payment. There are many consolidation paths to choose from (consolidation loan, credit counselling, a proposal) and depending on the option you choose you can lower your interest rate or get complete interest relief.

In Ontario there are 3 debt consolidation paths available to consumers. You can consolidate debt by:

• Consolidating debts with a debt consolidation loan
• A manageable debt repayment plan either alone or though a program.
• Eliminating debt with a consumer proposal that consolidates your debt into one monthly payment.

It can be sobering to take the pulse of your finances. For some, it’s an eye opener – and not in a good way. By consolidating your debt in a loan or making a deal with your creditors, you can lighten your load of financial commitments and speed up your arrival at a debt-free life.

This list may have you asking: What is the right option for me? This is a fantastic question as each path has its strengths and weaknesses. Although we always have free consultations available, let’s looks at how each system works to try and come up with the safest and best options for your situation.

Debt Consolidation Loans (DCL):

Debt consolidation loans happen when you borrow funds from a single institution that will allow you to pay off more then one debt.

You will likely recognize terms such as: credit card balance transfer, debt consolidation loan, or home equity loan. These are great options if you are just having an issue organizing the debt but have sufficient income (i.e. you don’t need a reduction of your overall debt).

What are the advantages of choosing a Debt Consolidation Loan?

• You will instantly have fewer payments to juggle. This will make budgeting much simpler.
• Can allow you to avoid filing for bankruptcy which can be tougher on your credit score.
• A debt consolidation loan could have a lower interest rate so the total amount you have to pay to eliminate your debt could end up being less (remember to always look at the ‘total cost of borrowing’ as there could be hidden fees or a lower monthly payment could mean it will take much longer to pay off and thus more expensive overall).
• You may be able to reduce your total monthly payments to make your monthly budget more affordable and allow you to build a savings cushion for emergencies.

What are the disadvantages and risks choosing a Debt Consolidation Loan?

• Your total debt does not decrease which means you are not eliminating any debt. You are simple switching to whom you owe money. This means that if you were already finding that you couldn’t afford payments a DCL may not fix your bigger problem. 
• You are still paying interest. If you have bad credit, your interest rate may be high and the total you have to pay to be debt free could actually increase. This also means it could take longer to get out of debt with a debt consolidation loan.
• You will need to meet a lender’s requirements to qualify for a DCL. Banks will want to see your monthly budget to determine if you can meet your loan payments.
• To qualify for a DCL you also must be working, or have a source of income to allow you to repay the loan.
• Your lender could ask you for collateral (such as a car or a house). If you are struggling to afford payments this could put your property at risk of seizure and sale.
• It could open your credit cards up to allow you to spend more on them and you could find yourself in new debt before you have finished paying your DCL.

Debt Repayment Plans (DRP)

A debt repayment plan can either be organized by a credit counselling agency or you can contact your creditors yourself and try to negotiate a new plan that will make payments more reasonable. Sometimes a credit counsellor or even a creditor may be able to allow an interest free period or interest rate reduction.

What are the advantages of a Debt Repayment Plan?

• You can choose to include or exclude different debts from your negotiation (pick and choose)
• If you can get interest relief you can pay off your debts sooner
• In a plan created by a credit counselling agency you have one monthly payment made to the counsellor who then deals with your creditors.
• You may be able to successfully negotiate a debt settlement on your own. It can’t hurt to ask your creditors for help or an interest reduction. The worst they could say is “No”.
• You might be able to make a lump sum offer to an individual creditor.

What are the disadvantages of a Debt Repayment Plan?

• Your total debt does not decrease which means you are not eliminating any debt.
• In plans set up by credit counselling agencies there are certain debts that can’t be included (such as tax debts or payday loans).
• A credit counsellor will require you to repay your debts within three years.
• Creditors do not have to agree to your plan or to that of a credit counsellor and there is nothing that can be done about this.
• There are some companies that make promises they can’t keep and there is not the same licensing or accreditation system as with a trustee so there is no one to keep them accountable.

Debt Consolidation in a Consumer Proposal (CP)

Sometimes a debt consolidation loan may not be your best option when it comes reducing your debts. When you are finding you debt load overwhelming a consumer proposal may achieve debt reduction and a lower monthly payment in a more manageable way.

Exploring a debt consolidation loan options is an important first step first but if you don’t meet the qualifications, or  can’t afford to repay your debt in full, you should talk to us about a consumer proposal.

What are the advantages of a Consumer Proposal?

• One low and affordable monthly payment.
• Eliminates interest.
• Deals with almost all unsecured debts (including CRA).
• You can keep your assets and don’t have to put them at risk to be debt-free.
• Your situation may call for a reduction of debt (i.e. offing less to your creditors based on your situation) so you can be debt free much faster.
• Stops creditor wage garnishment and collection call harassment.

The result is you saving money by either offering less than the total amount or not having to pay the original (often high) interest that comes with debt such as credit card balances and other financial commitments. While this may seem a bit technical, what it comes down to is control – letting you get a better handle on your debt and giving you more financial breathing room and lower your monthly payments.

What is the difference between a debt consolidation in a Consumer Proposal and the other available paths?

The difference, of course, is that a trustee’s debt consolidation eliminates interest and often you only pay back a percentage of what you owe. The result is you saving money by either offering less than the total amount or not having to pay the original (often high) interest that comes with debt such as credit card balances and other financial commitments.

While this may seem a bit technical, what it comes down to is control – letting you get a better handle on your debt, making sure it’s a situation you can afford, giving you more financial breathing room, and lower your monthly payments.

Do you want to explore further? Not sure if you could benefit from going through a debt consolidation process tailored to your unique situation by one of the experts at Kevin Thatcher & Associates?

Give us a call or email us below to ask questions and schedule a free consultation with one of our counsellors. We have many offices conveniently located across Toronto & Southern Ontario.