Debt & Credit Consolidation Services
Are you juggling one creditor to pay another? Balancing credit payments against household expenses? If so, you may be looking for a way to consolidate credit so you can lower your monthly payments. Unfortunately, debt consolidation comes in many shapes and sizes in Canada. Knowing which to choose can be a challenge.
Debt Consolidation Options
- Debt consolidation loan
- Debt management plan
- Debt settlement program
- Consumer Proposal
Consolidating with a Debt Consolidation Loan
A debt consolidation loan is a loan that allows you to repay many other debts. For example, if you have three credit cards, you may be able to get a debt consolidation loan to pay off the credit cards, so that you only have one payment instead of three each month. You are consolidating your many debts into one, by refinancing with a new loan to pay off several old debts.
A debt consolidation loan can take the form of:
- A second mortgage on your home (also called a home equity loan)
- A line of credit
- A bank loan secured by some other asset or guaranteed by a family member or friend
What are the advantages of refinancing through debt consolidation?
The advantages of a debt consolidation loan are:
- You replace many payments each month with only one payment, which should make it easier to budget your cash each month.
- Your debt consolidation loan may have a lower interest rate than the rate you are paying on credit cards, so the loan should reduce your interest payments.
- With lower interest rates and/or extended terms, you may be able to reduce your total monthly payments.
There are some risks with consolidating through a debt consolidation loan. First, to qualify for debt consolidation you must meet the following:
- The bank will require a copy of your monthly budget to determine if you can meet your loan payments.
- You must be working, or have a source of income to allow you to repay the loan.
- You may require a co-signor or collateral (such as a car or a house). This could put your home or other property at risk.
- You are still paying interest and must be able to meet your consolidated payments.
Interest Free Debt Management Plans
A debt management program, offered through a credit counselling agency, allows you to consolidate certain debts, like credit card debt. You make one consolidated credit payment, like any other debt consolidation program, however, your credit counsellor may be able to negotiate an interest free period.
The downside of a DMP is that not all creditors will agree to combine their debts into the program. In addition, you must be able to repay your debts in full, even without interest.
Debt Settlement or Debt Consolidation?
Here is where the waters start to combine. There are several debt consolidation companies in Canada that are really offering debt settlement services. They are not offering you a new debt consolidation loan. Instead, what they are offering is to combine selected debts (usually just credit card debt) into a single payment with their agency. Some may charge significant up-front fees and may or may not be successful in negotiating with your creditors. Our recommendation is to be cautious when dealing with any agency that is not licensed or accredited in some way.
Disadvantages of Debt Consolidation
There is one big disadvantage to debt consolidation: your total debt stays the same. If you owe $20,000 on five credit cards you may be able to qualify for a $20,000 debt consolidation loan, but even if you do you will still owe $20,000! You have not reduced your total debt, so you will still be required to repay $20,000 plus interest to become debt free.
Consolidating Debt with a Consumer Proposal
Many see a consumer proposal as an alternative to bankruptcy, but it can also be viewed as an option when looking to consolidate your monthly debt payments. This is because it:
- Deals with almost all unsecured debts;
- Results in one, single, lower monthly payment;
- Eliminates interest;
- Reduces principal repayment.
If you don’t qualify for a debt consolidation loan, or cannot afford to repay your debts in full, talk to us about a consumer proposal.Book A Consultation Today