Are you feeling overwhelmed by debt, or staying on top of credit payments each month? If you are looking for a way to save money and simplify your monthly payments, debt consolidation may be the right answer for you. It is essential to know that debt consolidation is not a one-size-fits-all solution. In fact, there are many different types of debt consolidation, and they work very differently from one another. At Hudson & Company, we want you to have all of the needed information when making important decisions about your financial future. In this article, we explore Canada’s top debt consolidation options in detail so that you can take your next financial steps with confidence.
Debt Consolidation – What Is It?
Let’s say you have outstanding debts on three different credit cards, two unsecured loans, and a store card. This means that you have six separate credit bills each month alone. If you are like most of us, you also have to pay a mortgage/rent, utilities, phone bill, etc. each month. With so many debt obligations there is a higher risk of missing payments. Debt consolidation can significantly reduce your stress by absorbing your smaller credit debts into a single monthly payment. It may also save you money through lowered interest rates and/or possible debt forgiveness. With the help of debt consolidation, thousands of Albertans just like you are now able to manage their debts better and rest easy about their financial future. Consolidating your debts can make life a whole lot easier:
- Simplify – reduce the stress of multiple debt payments by combining them into a single monthly payment.
- Save money – it is possible to reduce or eliminate interest and/or repay less than what was initially owed with the right type of debt consolidation.
While debt consolidation loans, consumer proposals, and debt management plans are the preferred choice of many Canadians, which one makes the most sense for you? As you explore the options, make sure to consider your situation to determine if they are applicable. If you have any questions, feel free to reach out via phone, email or live chat.
1. Debt Consolidation & Consumer Proposals
A consumer proposal offers debt relief while consolidating your debts into easy and affordable monthly payments. A proposal is a legally binding agreement that must be administered by a Licensed Insolvency Trustee (LIT). In most cases, you will pay less than you owe, free of interest. A licensed trustee handles all matters of negotiation with your creditors and ensures that you only pay what you can afford. In many cases, people repay as little as 20% of the total amount owed. A filed proposal is binding on all creditors and stops any creditor action against you including wage garnishment and collection calls. In Canada, consumer proposals are the most popular choice for insolvency relief:
- Zero interest fees
- Your assets are safe
- You will never pay more than you can afford
- Your debts are consolidated into a single monthly payment
- Debt forgiveness – you may only be required to pay 30% of what is owed
- You can resolve all your unsecured debts
- You are guaranteed creditor protection
Does a consumer proposal make sense for you?
We want to ensure that you feel confident in knowing and understand all your debt consolidation options. You decide what makes the most sense for you. Looking for advice? A Licensed Insolvency Trustee will calculate the numbers to see what you can afford and answer any questions you may have about debt consolidation. In many cases, a consumer proposal is the most affordable option for Canadians who are looking to simplify and reduce their debt. In order to be eligible for a proposal, your total debts must not be greater than $250,000 (not including your mortgage or car loan), and you must be able to pay at least a portion of what you owe. At Hudson & Company, our licensed professionals will be able to help you decide if a consumer proposal is right for you based on your finances.
2. Debt Consolidation & Debt Management Programs
A debt management plan is typically administered through a credit counselling agency. They will combine smaller credit card debts into a single payment every month. This type of consolidation is best suited to anyone who has the finances to pay their debts but is unable to obtain a consolidation loan and wants to streamline payments. You must be able to pay your debts in full within the agreed upon term, which is typically up to 5 years. A consulting agent will try to negotiate for lower or zero interest. Depending on your circumstances, a debt management plan may be a viable option to simplify your debt. A debt management plans guarantees:
- Single monthly payments
- You choose which debts you want to include in the consolidation process
- An agent will negotiate on your behalf for a possible reduction of interest or zero interest
- No collection calls
And, a few things to keep in mind:
- Payday loans and tax debts cannot be included in a debt management plan.
- Many agencies charge an administrative fee for their services.
- A debt management plan will be recorded on your credit report.
- You do not receive debt forgiveness – you must pay 100% of your debts.
- Creditors do not have to approve the plan, and you could still face wage garnishment.
- A debt management plan is not legally binding on creditors.
A debt management plan is usually better suited to people who want to simplify a handful of smaller unsecured debts. If you are looking for debt relief, a consumer proposal is a better option.
3. Debt Consolidation Loan
A debt consolidation loan can be used to pay off multiple smaller debts. This type of refinancing can be used for bills, credit cards, payday loans, overdraft, and many small loans. One lender = one monthly payment. You will owe the same amount of money to a single lender and, ideally, at a lower interest rate. Because credit cards often carry such high-interest premiums, a loan should save you some money. Keep in mind that your interest rate will be partially dependant on your credit scores. If you have good credit standing, a debt consolidation loan is an excellent option as it will not reflect negatively on your credit score.
Advantages of a consolidation loan:
- Eliminating several monthly payments will make it easier to budget your finances.
- Interest rates for consolidation loans are typically lower than credit cards, reducing your monthly interest payments.
- An extended term for repayment may reduce the amount you pay monthly.
There are some requirements for a consolidation loan that must be met in order to qualify:
- You must have steady employment.
- You must be able to produce a monthly budget for the bank that shows you are financially able to make your projected loan payments.
- In some cases, a co-signer or collateral assets may be required the bank.
A debt consolidation loan is traditionally issued by a bank or credit union. This type of loan can include a line of credit, home equity loan, or secured bank loan (i.e. collateral asset or co-signature).
If you are considering a consolidation loan, here are a few things to consider:
- Not everyone qualifies for a loan.
- Not everyone can afford their monthly payment.
- No debt relief – same debt total, plus interest.
- It is possible that your rates may be high if you have a low credit score.
There are several advantages to a consolidation loan for those who are looking to simplify their monthly credit payments. The most significant disadvantage is that you will continue to owe the same amount of money. For example, if you owe $20,000 on four different credit cards, you could qualify for a single loan to pay off the various cards, but you will still need to repay $20,000 and all additional interest charges. If you are looking to reduce your debt, a consumer proposal may be a better option.
Keep in mind:
- If you apply for a longer term loan, it may take you longer to reach your goal of debt freedom.
- It is imperative to keep a budget and stick to it – it is surprisingly easy to run up new credit card balances, in addition to your existing loan, and find yourself with more debt than you can afford.
- Your monthly payments could increase if interest rates rise.
What this type of debt consolidation does is simplify your payment schedule and offer the potential for a lower interest rate. What it does not do is offer debt forgiveness.
Have questions? We have answers!
If you are looking for financial relief, debt consolidation is just one of the several options we offer at Hudson & Company. Your first appointment with us is entirely free. A Licensed Insolvency Trustee will review your unique financial situation and help you find the right solution for you. We have helped thousands of people just like you through their financial difficulties. Call 403-265-HELP (4357) today to schedule a consultation with one of our Licensed Insolvency Trustees.