In the quest to solve financial difficulties, many are faced with the question: “Should I take out a high interest loan to pay off my debt?” This article delves into the different aspects of this question, using two hypothetical individuals, Sally and Molly, to illustrate possible scenarios.
The Dilemma: High Interest Loans vs. Bankruptcy
Imagine Sally, who is $12,500 in debt and staunchly against filing for bankruptcy. She chooses to go down the path of high interest loans, borrowing $12,500 at an interest rate of 34.99% over a period of five years. Her monthly payments amount to $425.25. At the end of the term, she will have repaid the principal of $12,500 and an additional $13,015 as interest, totaling $25,515.06.
On the other hand, Molly, who also owes $12,500, decides to explore alternative solutions. She stumbles upon the concept of Consumer Proposals and decides to give it a shot.
The Alternative: Consumer Proposals
A Consumer Proposal is a federal program regulated by the Bankruptcy and Insolvency Act and is overseen by a Licensed Insolvency Trustee (LIT). It grants an immediate stay of proceedings, which essentially means a halt to all actions by creditors. They can’t contact you or garnish your wages, and if a garnishment has already taken place, it is stopped, allowing you to receive your full pay. Furthermore, all interest charges are halted.
Molly decides to file a Consumer Proposal, offering her creditors $12,500 over 60 months. In essence, a Consumer Proposal acts like an interest-free loan, with Molly making monthly payments of $208.33 for 60 months. In this scenario, Molly pays $12,500 in principal and absolutely nothing in interest.
The Comparison: High Interest Loans vs. Consumer Proposals
By choosing the Consumer Proposal, Molly saves $216.92 each month compared to Sally. She decides to invest this amount monthly in a savings plan at an interest rate of 5% for the next five years. While Sally’s monthly payments on her loan amount to $425.25, Molly’s total monthly outflow, including her Consumer Proposal payment and her savings plan contribution, comes to $425.33.
The Outcome
After 60 months, both Sally and Molly are debt-free. Sally, having made monthly payments of $425.25, has paid a total of $25,515.06. However, she has no savings at the end of her loan term.
On the other hand, Molly, who chose a different path, also becomes debt-free in 60 months. She pays a total of $25,519.80, which includes her monthly Consumer Proposal payments and her savings plan contributions. At the end of her term, not only is she free of debt, but she also has a considerable $15,098 in her bank account from her savings plan.
The Verdict
From this comparison, it can be concluded that borrowing money at high interest rates to get out of debt is not the most optimal solution. Instead, exploring alternatives like Consumer Proposals could potentially lead to more favorable outcomes.
Seeking Professional Advice
If you find yourself in a similar situation, it’s crucial to seek advice from professionals before making a decision. Companies like Allan Marshall and Associates Inc. offer consultations with highly trained professionals who can guide you in your journey to become debt-free.
Final Thoughts
When asking yourself, “Should I take out a high interest loan to pay off my debt?”, it’s crucial to consider all available options. High interest loans may provide a quick solution, but they often come with long-term repercussions. Alternatively, options like Consumer Proposals may seem daunting at first, but could offer a more sustainable path to financial freedom.
In conclusion, when faced with the question of whether to take out a high interest loan, the answer is not straightforward. It’s essential to do your research, consult with professionals, and consider all possible avenues before making a decision.
