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Debt Consolidation Loan

Debt Consolidation Loan vs Other Debt Management Options

Are you considering consolidating your credit card debt, overdue bills, and other unsecured debts? If so, you should be aware that a debt consolidation loan may not be your best option.

The path to true freedom from your debt is to first know all the debt relief options available to you. Only then can you determine your next best course of action. Consulting this guide will provide you with valuable insights into debt consolidation and other potential solutions.

What Is Debt Consolidation?

Debt consolidation involves taking out a new personal loan that is used to pay off all your existing debts. This way, you can focus on repaying only one monthly amount to your new lender instead of several monthly payments to various creditors, improving cash flow.

A debt consolidation loan sounds appealing, until you consider that when you consolidate your debt:

  • You remain indebted. You haven’t actually eliminated or reduced the total debt you owe.
  • You put any assets you use as security for the new loan at risk. For example, let’s say you borrow against your home but end up defaulting on payments to your lender. Your lender may decide to take action against you and foreclose on your home.
  • You must repay your debt in full – with interest.
  • That interest may be very high depending on your credit score, whether you put down any security for the loan, and other factors.
  • Your monthly payment may still not be affordable for you.

And all this is assuming you even qualify for a debt consolidation loan that can take care of your existing debt problems.

If you want to reduce your debt, there are other options that may be more suitable:

Consumer Proposal

In a Consumer Proposal, a Licensed Insolvency Trustee (LIT) negotiates the settlement of your debt with your unsecured creditors so you only have to repay a portion of that debt. The LIT will carefully examine your financial circumstances and propose a monthly payment amount that you can afford.

With a Consumer Proposal:

  • You do not have to repay the entirety of your existing debts.
  • You do not incur any interest.
  • You do not risk the loss of any assets since you don’t need to post-security.
  • Your monthly payment amount will be affordable.
  • You can become debt-free in less than 5 years. That’s because you will finally get relief from all unsecured debts included in the proposal.
  • You receive legal protection from your creditors. Your unsecured creditors will no longer be able to take action against you to recover the debt you owe.

With respect to this last point, a Consumer Proposal – like a Bankruptcy – is a legal procedure. In fact, these are the only debt relief options that offer debtors legal protection.

Here’s how it works. Once you file a Consumer Proposal (or a Bankruptcy for that matter), an Automatic Stay of Proceedings takes effect. Your unsecured creditors are no longer allowed to make collection calls, start or continue lawsuits against you, or put in place garnishments. This gives debtors the time and breathing room they need to get their financial affairs in order.

Debt Settlement

This is where a debt settlement company negotiates with your creditors on your behalf to reduce the total amount you owe. Sounds similar to a Consumer Proposal, right? Not quite.

With a Consumer Proposal:

  • The person negotiating on your behalf is a Licensed Insolvency Trustee – a professional that has the proper education, licensing, and credentials to assist you.
  • A legal, written agreement is put in place up front. The agreement must be adhered to by both the debtor and its creditors during the life of the proposal.
  • You would be responsible for making one affordable monthly payment until completion of the proposal.
  • Once the proposal is completed – in less than five years – you’re rid of these unsecured debts.

With debt settlement:

  • There are no special credentials required of the person settling your debt on your behalf. In fact, many creditors refuse to negotiate with debt settlement companies.
  • There is no agreement up-front. You would need to save enough money to accumulate a lump sum amount that the company would offer on your behalf as settlement of the debt you owe.
  • If you’re already looking to consolidate, you likely have overwhelming and unmanageable credit card and other unsecured debt and do not have access to a lump sum of cash. You would need to save up this amount, which may take years. You would also likely continue defaulting on the monthly obligations that you owe creditors.
  • During the time you are saving, with no agreement in place, your creditors can take action to collect on the debt you owe. This includes making collection calls, filing a lawsuit, and putting in place a wage garnishment.

Again, a Consumer Proposal may be a better option. A Consumer Proposal is the safest way for you to consolidate your debts for less than you owe. And it comes with legal protection from your creditors while you repay them.

Debt Management Program

A Debt Management Program (DMP) can help you pay off debts easier. Nonprofit groups offer financial advice and set up the payment plan.

  • First, a counselor reviews your finances and helps create a monthly budget so you can reduce your monthly bills.
  • Next, they negotiate with your creditors to lower interest rates or simplify payments.
  • Sometimes, they suggest combining debts into one payment to make it easier.
  • You make one payment to the counseling agency, who then pays your creditors. You will fully repay all your debts within 5 years.
  • Along the way, you receive tips on managing money better.

DMP isn’t a loan; it’s organizing debt for gradual repayment.

It can lower rates and simplify payments, but careful consideration and advice are crucial before joining.

  • While enrolled in a DMP, creditors may report your accounts as being managed by a third party, which could temporarily lower your credit score.
  • Some DMPs charge fees for their services, which can add to your overall debt burden.
  • Not all debts can be included, such as tax debts or payday loans.
  • You must repay your debts in full within 3 years.

Home Equity Loan / HELOC (Home Equity Line of Credit)

A Home Equity Loan, or HELOC, lets homeowners borrow money using their home’s value as collateral. With a loan, you get a lump sum and pay it back monthly for 5-30 years at a fixed rate. A HELOC is like a credit card, offering a credit limit based on your home’s value. You can borrow when needed and pay interest only on what you use. Both options can cover home repairs, debt consolidation, or education expenses, but failing to repay could mean losing your home. Consider your options carefully before deciding.

Line of Credit (LOC)

A Line of Credit (LOC) is a flexible way to borrow money as you need it, up to a set limit. Unlike a regular loan, you borrow smaller amounts when necessary instead of getting a lump sum. Once approved, you can access funds through cheques, debit cards, or online transfers. You only pay interest on what you use, not the whole limit.

There are secured LOCs, needing collateral like a house, and unsecured ones with higher rates. They can be used for various needs like home repairs or business expenses. They’re convenient but require responsible use to avoid excessive debt.

Credit Card Balance Transfer

A Credit Card Balance Transfer is shifting your debt from one card to another for better terms, like lower rates. When you transfer, the new card company pays off your old balance, and you start owing them. This can save money if you’re paying high interest.

Some cards offer no-interest deals, helping pay off debt faster. But watch for transfer fees, often 3-5% of the amount moved. If you don’t pay before the deal ends, you could end up with more interest. Check all details before transferring to ensure it’s the best choice for you.

If you seek relief from overwhelming debt, contact a Licensed Insolvency Trustee  (LIT) as soon as possible.

The most important step to freedom from debt is to know your options. And the sooner you get help, the more options you may have available to you.

LITs can advise you on all your debt relief options and are also able to assist you with the full range of debt relief options.

Consider that:

  • Your initial consultation is free. It is at this initial consultation that your LIT reviews your particular financial circumstances and advises you about every debt relief program that exists as well as their pros and cons. You receive customized financial advice and an expert opinion on your best option.
  • LITs are licensed and governed by the Canadian government. They have the education and credentials to properly advise you.
  • LITs must adhere to strict ethical rules and regulations. You can rest assured that you are receiving financial advice that is in your best financial interest.

You deserve to live a financially healthier life – one free of the stress and anxiety that overwhelming debt brings with it.

As seasoned Licensed Insolvency Trustees, Adamson & Associates Inc. provides Canadian debtors with a range of debt relief services – from simple budgeting, debt settlement, and credit counselling to Consumer Proposals, personal Bankruptcy, and corporate Bankruptcy.

If you have questions about Debt and Credit Consolidation Services in Ontario, you’ve come to the right place. Call 519-310-5646 today to learn how Adamson & Associates can help you. Your initial consultation is free. It’s our mission to help you get the fresh start you deserve.

John Adamson, Licensed Insolvency Trustee Ontario

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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