4 Ways To Consolidate Your Debt

When you have numerous debts, debt consolidation should be one of the first options you consider to regain control of your finances. Before you start the process, check your credit score.

Knowing your score can help you identify what loans and consolidation plans might be available. Advantages of consolidating your balances into a single loan may include:

• Make just one monthly payment
• Lower monthly payments
• Ability to negotiate lower interest rates
• Pay a fixed monthly amount until you are debt-free, preferably within a window of 3-5 years

1)      Personal loan, including home equity loanor line of credit

If you get a personal installment loan with a fixed repayment period, you will know exactly how much you have to pay each month until you are debt-free. You won’t run the risk of falling into the trap of making minimum payments and stretching out the debt for many years. In addition, carrying a balance on an installment loan may be better for your credit scores than a credit card with a high balance.

These loans only work over the long term if you can be financially disciplined enough to change your lifestyle so you do not go back into debt again. Some people build up even more debt after a period of time because they did not change their spending habits. Also, be careful if you take out a home equity loan or secured line of credit. If you default on these secured loans, you may be at risk of foreclosure on your most important asset, your home.

2)      Credit card consolidation or credit balance transfers

You may be able to use a low-rate credit card or 0% balance transfer offer to consolidate higher rate balances, but there are things to look out for:

• There may be a fee for the transfer
• The offer usually carries an introductory (‘teaser’) rate, typically for 6-12 months. After that, the rate can jump up significantly
• Using a substantial portion of your available credit  can hurt your credit scores, at least until you pay it down

3)      Debt Consolidationwith a Non Profit Agency

While credit counselling agencies do not consolidate debt, a Debt Management Plan (DMP) through one of these organizations, such as Money Mentors or Credit Counselling Society, is similar in many ways to getting a consolidation loan. If you enroll in a DMP, you’ll pay the counselling agency each month and in turn the counselling agency pays each of your participating creditors over the term of your DMP. In addition, your interest rates may be reduced and your monthly payment should be lower as well.

In a typical DMP you would make a single monthly payment over a period of 3 to 5 years, paying back the full amount of debt usually with a reduced interest rate. Your Equifax credit rating would be an R7.

4)      Consumer Proposal

Similar in process to a Debt Management Plan, the Administrator (a Trustee) will work with you to develop a Consumer Proposal. This is a formal settlement offer to all of your unsecured creditors, where you will pay creditors a percentage of what is owed to them or extend the time you have to pay off the debts, or both. It is similar to a consolidation loan in that you’ll typically only have one monthly payment, but that payment is given to an Administrator, who then periodically distributes the money to your creditors. As long as the majority of your creditors (based on debt value) accept the Consumer Proposal, it is a legally binding, negotiated settlement made between you and your unsecured creditors and everyone will have to abide by the terms of the Consumer Proposal.

In a typical Consumer Proposal, you would make a single monthly payment over a period of no more than 5 years. In most proposals you will pay less than the full amount you owe and still get discharged from your debts, with no interest. Your Equifax credit rating would be an R7.

By filing a Consumer Proposal, you can keep your existing assets, future assets and tax refunds, freeze interest charges, opt to keep or walk away from secured loans and assets, stop wage garnishments and end harassing or threatening phone calls from creditors. As long as you make your payments under the terms of your Consumer Proposal, upon completion, you will be able to rebuild your credit and be debt-free. 

As licensed bankruptcy Trustees and Proposal Administrators, MNP Ltd. can review all of the ways to eliminate debt and help you determine which method of debt consolidation, if any, is the right choice for you.