Choose the Right Debt Consolidation Plan for You
Are you missing payments on your car lease, skipping credit card due dates, and barely chipping away at your line of credit — all at the same time? If you’re having trouble juggling multiple debts, you might decide that debt consolidation is a great first step to getting back on track.
Making just one payment every month sounds great, but how do you get there?
Debt consolidation comes in many different shapes and sizes. There are secured and unsecured loans, lines of credit, balance transfer credit cards and even debt settlement and debt management plans that are designed to meet your needs.
Some plans let you call the shots on payments while others are structured. Some come with deadlines while others are open-ended. Some have you put up collateral while others ask for upfront fees. With all these choices, picking what’s best for you may seem overwhelming.
There are benefits and drawbacks to each option. Here are key points to consider when choosing the best debt consolidation option for you. If you’re ever not sure which option is best for you, contact us and we’ll help you sort it out. There’s no cost for calling us and asking your questions.
How Much Does Debt Consolidation Cost?
The costs of debt consolidation change depending on interest charged, upfront costs, and ongoing fees. Consider them all carefully to help determine which route to take.
A credit card balance transfer could lure you in with a low interest rate for an introductory period, but remember that rates will spike after that ends. If your debt isn’t paid off by then, then this is a costly option. Decide if a balance transfer offer is worth it by looking beyond the attractive promotional period. Read the terms and conditions so you understand what your long-term situation will be with the balance transfer card.
Other options come with other expenses. A Debt Management Program is done with the help of a non-profit credit counselling agency that acts as a mediator between you and your creditors. An organization like the Credit Counselling Society consolidates your payments into one amount based on your budget. In turn, creditors support the program by cancelling or greatly lowering ongoing interest charges. There’s a $50 - $75 set-up fee and a monthly charge of no more than $75 each month to continue the plan. Weigh this against how much interest you’ll save to see if this is a good option for you.
Debt settlements can be negotiated between you and your creditors, but they’re difficult and time-consuming to do right. You end up repaying less than you owe under terms both parties agree to, but the expert brokering this deal on your behalf will charge you a fee. Some charge upfront whether the settlement is successful or not. Others charge a percentage of either what you owe or what you settle for.
In our case, we charge 15% of what you’re settling for as part of what you’re already paying your creditors so that it isn’t an additional cost. We also only charge you if the settlement is successful; if it’s not, you don’t pay us anything.
A legal type of consolidation is a Consumer Proposal. It can only be arranged by a licensed insolvency trustee and it costs about $1,500 to set up. If it goes forward, the trustee retains 20% of your future payments as a fee to manage the proposal.
To figure out which form of debt consolidation is most cost-efficient, lay out all your debts, including the interest and fees each account is incurring, and then crunch the numbers. Here are some other factors to consider:
Can You Consolidate on Your Own or Do You Need Help?
Debt consolidation isn’t the solution to get you out of the debt—it’s just a tool. If you aren’t careful about tackling your consolidated debt and take advantage of the freed-up space on your credit cards and lines of credit, then you’ll end up in worse shape. But determining if you have the initiative and discipline to chip away at the debt on your own is tricky.
If you’re using a line of credit or credit card to consolidate your debt, it’s up to you to stay on track. If you’re working with a credit counsellor, financial planner, or with your bank and creditors to carve out set payments, there’s much more guidance and accountability. You’ll be less likely to relapse into old spending habits if you have a credit counsellor helping you with budgeting and tracking your spending.
Be honest with yourself about your habits. If you know you have triggers and weaknesses that brought you to this point, then you’re better off seeking professional help to walk you through the process. If a one-off situation such as health issues or job loss with COVID-19 led you to your predicament, and you’re certain you have the know-how to get back on track, you could be able to pull off your debt repayments without any coaching.
Are the Repayment Terms Set with Deadlines or Open-Ended?
A debt repayment plan pulled together by a credit counselling agency comes with an end date about 3 - 5 years later. An introductory rate on a line of credit or a credit card may force you to aggressively tackle any debts in this consolidated loan before your promotional rate expires.
Credit cards and lines of credit, on the other hand, are prime examples of revolving debt. You can whittle away at the debt, but you can keep adding to it too if you aren’t careful. There is no concrete deadline to paying off your consolidated debts with revolving accounts, but the longer they last, the more interest you’ll pay.
Base your debt repayment strategy on SMART goals – specific, measurable, achievable, realistic, and timely. Keeping your debts on credit cards without a timeline to work towards is a tricky predicament to be in – you could be paying off and then adding to your debts for years. However, a debt consolidation loan from your bank or credit union has a fixed term with a debt-freedom date attached, much like a Debt Management Program does.
Do You Want a Flexible Payment Plan?
Because people heading into debt consolidation may not be the best loan candidates, an unsecured loan—where there’s no collateral on the line—will be hard to snag. Instead, you may be signing up for a secured loan, in which a lender will use your home, car, or other assets as security in case you can’t hold up your end of the agreement. You have much more on the line when the roof over your head is used as insurance.
Debt consolidation plans could be as open-ended or as rigid as you choose for them to be. A credit counsellor could set your payments to a monthly payment spread out over 5 years, or you could aim for a 3-year plan that forces you to make tougher decisions about your spending. A secured line of credit could have payments as low as interest only. This route offers a lot of flexibility, but be wary of debt fatigue. If you’re just paying off interest on your debt consolidation or barely putting a dent into the lump sum you borrowed, then you’ll grow tired of the constant debt burden. It’s up to you to make realistic monthly payments that are neither too hard nor too easy on your spending habits.
How Will Debt Consolidation Affect Your Credit Rating?
The most conventional plans, such as consolidating your debts through your bank with a secured loan for the first time, won’t tamper with your credit score too much. Opening one credit card to pull off a balance transfer isn’t likely to sink your credit score either so long as you play by the rules and make your monthly payments. As with all forms of credit, how you manage your payments on a monthly basis is reflected on your credit report and will affect your credit score.
Once you seek out a debt repayment plan, debt settlement, or Consumer Proposal, your credit rating will take a hit. Making payments through a third party will be reflected with a 7 notation and if you negotiate a settlement on your own, a 9 will be reflected. If you settle or repay your debts through CCS, we’re able to remove the 7 notation after only 2 years and help you rebuild your credit rating without getting back into debt.
The key is to weigh the overall consequences, both short and long-term. A temporary hit to your credit score as you get back on track might be worth it when you consider the alternative of staying in debt or letting it get worse. Taking a brave first step might be hard, but you’ll be rewarded with a path to becoming debt-free.
How to Get Help to Choose the Best Debt Consolidation Option for You
With so many factors and questions to consider, don’t be worried if you need help to figure it all out. Even those of us who’ve worked in the financial industry for years see this as a big task. That’s why we’re here to help. Our Credit Counsellors are experts at helping Canadians figure out what to do about debt problems. Reach out to us by toll-free phone, email, or anonymous online chat. Our appointments are free, confidential, and don’t obligate you to anything further. There shouldn’t be any barriers to getting the information and guidance you need to make an informed decision. Contact us today—you’ve got nothing to lose but your debt.