Can Debt Consolidation Hurt Me Financially?
As of 2014, the average Canadian carried over $20,000 in debt, excluding mortgages.
There are several ways to get out of debt and get back on track, financially, including debt consolidation.
Many people view debt consolidation as “debt relief,” which isn’t exactly true.
In fact, debt consolidation isn’t always the best option.
It really depends on your financial situation, the type of debt you have, and other aspects of your personal situation.
The reality is, there is no “one size fits all” solution for debt relief, whether you’re considering consolidation, bankruptcy, or a consumer proposal.
The best thing you can do is to discuss your options with a Licensed Insolvency Trustee.
Before you do, though, you can learn a bit more about debt consolidation and whether it can hurt or help you.
To understand that, take into consideration that there are three popular ways to consolidate your debts:
- Apply for a line of credit or a personal loan from your bank.
- Refinance your home equity.
- File a consumer proposal.
The idea is that by doing any one of these things, you’ll lower get a lower interest rate via one large sum, rather than several small debts with higher rates.
But, again, it depends on your situation.
With that in mind, let’s look at some of the potential pros and cons of each of these options.
Getting a Loan From the Bank
If most of your debt comes from credit cards, consolidating your debts with a bank loan can be beneficial.
Most banks will offer a lower interest rate than credit card companies.
Plus, taking out a bank loan will keep your creditors happy because you’re committing to paying off every last cent of what you owe.
What Are the Cons?
So, what are the potential drawbacks to consolidating through a bank loan?
One of the biggest problems is that most banks will only consolidate debts you have through their institution.
You might end up only being able to do “half” of a consolidation, which really isn’t helpful.
Additionally, if you don’t have a steady income and can’t prove that you’ll pay the loan back, your application could get denied.
You can use our debt consolidation calculator to determine what your payments would be depending on the interest rate of your bank.
Refinancing Your Home Mortgage
Refinancing your mortgage frees up some of your money since the payments and interest rates will be much lower.
As a result, you’ll have more money in your pocket that you can save up to pay off those debts faster, or to use toward other expenses while you’re steadily making new mortgage payments.
What Are the Cons?
Thanks to recent policy changes, it’s a bit harder than it was before to refinance your mortgage.
For starters, you can only borrow up to 80% of your home’s value.
So, if you already owe a balance that is more than that 80%, there’s a good chance you won’t qualify for refinancing, anyway.
Even if you do qualify, you’re going to end up paying off your debts for a longer period of time.
Yes, the interest rates are lower.
But, calculate how long you’ll have to pay and how the interest rates coincide with that.
If you’re making payments at a 3-4% interest rate for 15-20 years, it could end up costing about the same amount as something with a higher interest rate that gets paid off quickly.
Now, if you are struggling financially and need the lower payments now, it can be a good option.
But, consider some of the potential cons before you consolidate your debts with a second mortgage.
Considering a Consumer Proposal
Consumer proposals are popular solutions for debt relief for several reasons.
First, your existing credit score doesn’t affect whether or not you’ll be approved for a proposal, so you don’t have to rely on a co-signer in order to file one.
One of the most appealing things about a consumer proposal is that there is no interest.
So, you won’t risk putting yourself under another pile of debt thanks to a high-interest rate.
Additionally, you only have to pay off a portion of your debt.
When you work with a qualified Licensed Insolvency Trustee, they will do the legwork for you and once the consumer proposal is filed, your creditors will not come after you for more than what is negotiated and agreed upon in the proposal itself.
What Are the Cons?
While consumer proposals can be great options for people struggling with debt, there are some potential drawbacks to consider, depending on your situation.
First consumer proposals will impact your credit score.
While you don’t need excellent credit to file a proposal, getting one will affect your score negatively, and could for years to come.
In fact, a consumer proposal will remain on your credit report for three years after your final payment is made.
You also can’t take more than five years to pay off the amount agreed to, and you cannot change that amount throughout the length of the proposal without filing for a new one.
So, it’s important to understand what you’re getting into and what you can commit to with a consumer proposal.
As you can see, there are pros and cons to consider when it comes to just about any type of debt consolidation.
With that being said, it isn’t necessarily a bad thing – it just depends on your personal financial situation.
The best thing you can do is to talk to a Licensed Insolvency Trustee to determine the best option for you.
If you’re in debt and you’re trying to make payments while surrounded by several different interest rates, consolidation can be a viable option for the right candidate.
Feel free to contact Bankruptcy Canada to talk to a Licensed Insolvency Trustee today and to learn more information about your best route for managing your debt.