Everything You Need To Know About Debt Consolidation In Canada
While Canadians having debt is nothing new, the number of loans falling into default and the amount of household debt Canadians are carrying has been steadily on the rise over the past 30 years. Debt consolidation has become an appealing and beneficial option for many Canadians struggling to get out from under their debt.
When many people sit down and take a good hard look at their finances, the debt looms large. Canadians with significant amounts of debt feel they are part of a vicious cycle it is difficult to escape from. High-interest debts often mean payments are merely chipping away at the accrued interest, rather than paying down the principal. Those suffering from the stress related to carrying substantial debt often feel the affects not only in their pocketbooks, but also in their mental and physical health and wellbeing.
Fortunately, there are many options available to people who want to get out from under their debt. Debt-consolidation loans are becoming an increasingly popular option to assist borrowers with paying down their consumer debt through single and affordable monthly payments.
Debt Consolidation in Canada
Canada is seeing increasing numbers of its population in search of a way to simplify and reduce their monthly debt payments. Debt consolidation has become more commonplace as it involves the combination of multiple high-interest debts or loans into a single low-interest rate debt.
Debt consolidation serves two vital financial services: it pays off the consumer’s debt and simplifies their finances by replacing multiple bills with a single lower-interest monthly payment.
The Pros of Debt Consolidation
There are a number of advantages to debt consolidation that borrowers should consider. From simplification to lower interest rates, securing a consolidation loan can be the first step to reaching financial freedom and future goals.
- Having one monthly payment is a huge advantage. This eliminates a lot of the stress related to coordinating and remembering multiple payments needing to be paid out each month. Imagine the relief of not having to coordinate paying different banks and creditors at the same time.
- Having one monthly payment to make, rather than several, greatly reduces the likelihood of forgetting about one and having to pay costly late-payment penalties.
- The simplification that results from only having one payment means an improved credit score as it becomes clear you are steadily and regularly paying down your debt, and through the debt consolidation loan and the eyes of the lenders, your debt is technically paid off.
- A reduction of the stress associated with constant calls from creditors. Once your debt consolidation loan pays off your lenders, the pressure from collections agencies will stop.
- Easier maintenance of the household budget is accomplished. With only one monthly debt payment to make, managing the household finances will be easier and less stressful overall.
The Cons of Debt Consolidation
Like most things in life, consolidating your debts has both its advantages and disadvantages. If you are exploring your debt-repayment options, you would be remiss to not explore into the cons of joining your debts under one interest rate and payment.
- While Canadians turn to consolidating their debts more than most other debt solutions, it is not the best option for everyone. The simplification of an individual’s finances is, undoubtedly, a huge benefit; however, when it comes to someone wanting to free themselves completely of debt, consolidating does not always work.
- Some people actually end up with more debt than they started with. This is due to the fact that consolidating your loans does not equate to lowering your principal.
- While consolidation involves a lower interest rate, borrowers are still on the hook for paying off the total debt amount owed prior to consolidation.
- What many people forget to consider is that consolidation does not necessarily shorten the time it takes to pay down the existing debt.
How Do I Determine if Consolidation is Right For Me?
As debt consolidation is not the only debt-repayment option available to Canadians, you might be wondering how to know if it is indeed the right choice for your present financial situation. There are numerous online debt consolidation companies that will advise you as to whether debt consolidation is the best option available to you.
Not every type of debt is eligible for debt consolidation, so the first step is determining which of your debts you are most interested in consolidating. For example, most people’s highest debt, their mortgages, are not eligible. Credit card, consumer loans, and public utility debts are all examples of debt that is eligible.
Most often, companies in the financial-assistance industry will provide debt counsellor services that can help you determine what your best course of action should be.
How Can a Debt Counsellor Help with Debt Consolidation?
A debt counsellor knows the financial-assistance industry, including all of its resources and programs, like the back of their hands. They are experienced and knowledgeable about how to help borrowers through empowering them with information.
A certified credit counsellor will work with their client to draft a comprehensive list of all their existing debts. This total debt amount will then be applied to the consolidation concept to see if the client’s individual financial situation will be improved. Most often, the counsellor will calculate monthly payments of the total debt amount before and after consolidation. The result will help determine if it is a beneficial option for their client.
If it is determined that a debt-consolidation loan is the best option, the debt counsellor can help prepare all the documents needed to apply and will advise their clients on how best to proceed.
What is An Alternative Option to the Consolidation of Debts?
The options for debt repayment differ case by case. For some people, paying down their debt gradually is good enough; for others, getting out of their debt as fast as possible is their ultimate goal. For those looking for fast debt repayment, ‘debt settlement’ is a more favourable option.
Debt settlement is a process whereby creditors agree to waive a portion of the principal that is currently owed, provided you are making regular payments. This results in a lighter debt load, as well as as reduction in the time it will take to completely pay it off.
In most debt settlement cases, the average interest rate of the total debt is reduced as well, making the payments to the creditors even easier to make.
Is There a Disadvantage to the Debt Settlement Option?
If the debt settlement option is sounding too good to be true, that is because there is one major drawback: it hurts your credit score. So for anyone planning on hitting one of those major life benchmarks in the near future like purchasing a home, getting an education, or buying a new car, borrowing will be that much harder due to a lower credit score.
How Do I Improve My Credit Score?
Now, that’s not to say that a lower credit score is irreversible, but credit scores are calculated based on years of financial activity. However, there are five popular methods known to elevate individual credit scores.
1) Keep a Vigilant Watch Over your Credit Card Balances
Many people plead ignorance when it comes to their credit card debt. The solution is simple: check it regularly so it doesn’t get racked up unexpectedly.
2) Eliminate Credit Card Balances as Quickly as You Can
Take a moment, or enlist the help of a debt counsellor, to calculate exactly what it costs you to use your credit card to pay for things at its current interest rate. Once you figure out what a $10 item can cost you over time, you will likely use the card more selectively.
3) Pay All Your Bills on Time
When it comes to your utility bills, this is a great place to build up your credit. Service providers appreciate customers who pay their bills consistently and on time. In addition to benefiting your credit score, your service providers might consider lowering your rates or offer you special discounts to keep your business.
4) Institute a Method of Tracking Payment Dates
Believe it or not, there’s an app for that. If you’re a modern techie, do a little research to find a calendar app that keeps track of your payment dates and sends reminders when they are approaching. Not missing payment dates is not only good for your credit, it can also save you money by avoiding costly late-payment penalty fees.
5) Leave Old Debt That has Been Paid on Your Report
Removing old debt from your report is paid debt that creditors can’t see. Paid debt speaks to your ability to pay lenders, and this can elevate your credit score.
The world of financial planning is a complex one. While some Canadians opt for the strategy of avoidance through placing their heads in the sand and only looking up when debt is insurmountable, others choose to empower themselves with information regarding the various debt-repayment options available to them. As one of the most popular debt-repayment strategies, debt consolidation offers a number of advantages to its users, but is not the best option in every circumstance.
- Debt Consolidation Yukon
- Debt Consolidation Saskatchewan
- Debt Consolidation Quebec
- Debt Consolidation PEI Prince Edward Island
- Debt Consolidation Ontario
- NWT North West Territories
- Debt Consolidation Nunavut
- Debt Consolidation Nova Scotia
- Debt Consolidation Newfoundland
- Debt Consolidation New Brunswick
- Debt Consolidation Manitoba
- Debt Consolidation British Columbia
- Debt Consolidation Alberta
CONSUMER PROPOSAL EXAMPLE
Example Unsecured Debts
|2||Credit card 1||$6,812|
Your Monthly Repayments Would Be
a Consumer proposal $748
(total contractual repayments)
a Consumer proposal $295
(total contractual repayments)
* Subject to creditor acceptance
* Payment subject to individual circumstances
* Credit rating may be affected
* Fees apply, subject to individual's circumstances.