What are my debt consolidation options?
2020-06-30 minute read
Consolidation is one of the options you may choose to investigate if your debt payments have become overwhelming. Though there are numerous ways to consolidate your debt, the practice generally involves lumping most or all your balances together into a single affordable payment.
Consolidation options are varied and come with their own benefits and potential risks. Let’s consider pros and cons for some of the options available to consolidate debt.
Balance Transfers
Your bank or credit card provider may offer the opportunity to transfer the balance of one or more debts to a credit card or line of credit at a reduced rate over a set timeframe — usually between six months and a year.
Qualifying for a balance transfer typically requires a decent credit score and good borrowing history with the lender. It will also typically involve paying an up-front fee, usually in the neighbourhood of three percent of the total balance you’re transferring over.
Pros |
Cons |
| Great introductory rates
Most balance transfer offers feature an ultra-low or zero percent introductory interest rate. This maximizes the efficiency of every payment and can help you pay down the debt much faster — provided you don't add to it over that timeframe. |
High rates after introductory period
Once the introductory period ends, any remaining balance will be subject to the normal interest rate (usually around 19.99%). Before committing to a balance transfer, ensure you know all the rates and terms you are agreeing to for the lifetime of the debt. |
| Maintains your credit
There's a twofold benefit here:
|
Temptation to spend
Instantly freeing up space on credit accounts can be dangerous if you don't have a plan to prevent future debt. Consider reducing your credit limits, cancelling existing accounts or other techniques to prevent overspending. |
Consolidation Loan
Generally obtained through a bank or private lender, a consolidation loan enables you to combine most or all of your outstanding debts into one affordable monthly payment. It will ideally have a much lower interest rate than you’re currently paying on average between your credit cards, lines of credit and other loans — reducing both the number and total cost of your monthly debt payments.
Pros |
Cons |
| Simplifies monthly budgeting
Instead of juggling multiple debt payments every month, you just have one. This significantly cuts down on your stress and makes it easier to keep track of your finances. |
Potential for high payments
To avoid paying more than you are right now, it's critical to ensure your consolidation interest rate is lower than the average of all your outstanding debts. Don't get so swept away by the promise of making fewer payments that you end up putting yourself in a more difficult financial position. |
| Increases your cash flow
A consolidation loan with a favourable interest rate, could potentially free up hundreds of dollars in your monthly budget. You can direct these surplus funds toward paying your debt down even faster or necessities you couldn't afford previously. |
Temptation to spend
If your old credit accounts remain active, you may be tempted to use them. Consider cancelling or reducing your credit limits to prevent adding new debt and repeating the debt cycle. |
Debt Management Programs
Depending where you live, credit counsellors and other service providers may offer a handful of options which allow you to pay back debt at a reduced amount over a certain timeframe. Usually this involves entering either a Debt Management Plan or otherwise negotiating an informal debt settlement with your creditors.
Pros |
Cons |
| Pay off debts
These programs can be effective at reducing both the timeframe and total cost of your debts — provided you have the income to sustain relatively large payments through the duration of the program. |
High payments
Some debt management companies charge large administrative fees which result in a high monthly payment that can strain your budget. |
| Good advice and support
Many credit counsellors can offer insight and feedback about your financial situation and relationship with credit — and help you avoid falling back into the cycle of debt. |
No legal protection.
Creditors are not required to agree to the terms of your program and may terminate your agreement at any time. Moreover, creditors may still purse collections action — including wage garnishments and court judgements for unpaid debts — even while they participate in the debt management program. |
Consumer Proposal or Bankruptcy
Bankruptcies and Consumer Proposals are the only two federally legislated options to ‘consolidate’ your debt. They are also the only two options which, provided you meet your responsibilities, offer both legal protection and a clear path to debt freedom. Most debts may be included in a Bankruptcy or Consumer Proposal and these options tend to be the most cost effective for debtors.
Pros |
Cons |
| Legal protection
Both Consumer Proposals and Bankruptcies place a stay of proceedings on all current and future collection action, wage garnishments and court judgements. This eliminates the stress of dealing with your creditors and allows you to focus on rebuilding your finances and your life. |
Effect on credit
Bankruptcies will negatively impact your credit rating for at least six years after their completion. Consumer Proposals will negatively impact your credit rating for at least three years after their completion. However, they also offer the opportunity to begin rebuilding your credit almost immediately —certainly sooner and more effectively than if you were to continue the cycle of debt. |
| Clear path to debt freedom
Bankruptcies and consumer proposals give you a transparent, legally binding cost structure, process and timeline to eliminate your debt. You will never be caught off guard by unexpected administration fees or creditors withdrawing their participation. |
Stigma
Many people avoid Bankruptcy and Consumer Proposals because of outdated attitudes toward insolvency. Just remember, these programs exist to give honest, unfortunate debtors like you a second chance and the opportunity for a financial fresh start. |
| Financial counselling
Every person who files a Consumer Proposal or Bankruptcy must participate in two financial counselling sessions. By discussing everything from budgeting strategies to savings goals and understanding the causes of debt — these sessions will give you the confidence to create a stable financial future. |
The Right Solution
When you’re trapped in the cycle of debt and faced with a range of options, it can be difficult to know which choice is the right one for you and your financial future. Thankfully, you don’t have to make that decision alone. Licensed Insolvency Trustees will always offer a no obligation Free Confidential Consultation to review your financial history, discuss your goals and help you find the best path forward.
Licensed Insolvency Trustees are the only debt professionals in Canada who can administer Life-Changing Debt Solutions such as Consumer Proposals and Bankruptcies. However, they also have a legal and ethical duty to explain all your debt reduction option and provide an unbiased opinion about which options you’d benefit from most. From the moment you walk in their door and through every decision you make, you can feel comfortable knowing you’re getting the best, most informed and most trustworthy advice possible.
You’re only one call away from defeating your debt for good. Call MNP today to begin your financial fresh start today.
Linda Paul
Senior Vice-President
CIRP, LIT
