Are you swamped with debt and thinking about debt consolidation? You are not alone, even though it may not feel like it.. Despite inflation cooling down slightly, a significant number of Canadians are still dealing with financial troubles, according to a recent article from GlobalNews.
Debt consolidation may be a good option for you; however, there are other debt relief strategies in Canada that could be even better for your specific situation.
This is why we highly recommend speaking to a non-profit debt counsellor or financial advisor before deciding whether you should consolidate your debts.
Think of debt consolidation as bundling your debts together, much like a package deal, into one single lower-rate monthly payment. Instead of juggling multiple payments and interest rates, you have one single payment every month to a single lender. However, if the interest rate and terms aren’t good, consolidation will backfire! Let’s dig deeper into it…
Who Needs Debt Consolidation?
Debt consolidation can be a good option for people who:
- Are overwhelmed by multiple debts.
- Have high-interest credit cards or loans.
- Want to simplify their finances and loan repayment.
- Want to reduce their debt and improve their credit score over time.
How It Works
- Initial Consultation/Assessment: A financial pro or credit counsellor evaluates your situation to see if consolidation is a good fit. See our provincial debt consolidation pages to find debt counsellors and debt consolidators near you:
- New Single Loan Provided: You get a new loan to cover your old debts, which should be lower interest than your existing debt. If not, it won’t work, and you’ll end up paying more!
- One Single Payment: You make one monthly payment towards this new loan.
Things to Consider
- Interest Rates: This is the most important part! Make sure the interest rate of the new loan is lower than the interest rate on your old debts.
- Fees: Some consolidation options have fees. Ask about all the fees beforehand and in writing.
- Credit Score: A credit check for your new loan may temporarily affect your credit score, but successful repayment can improve it. It definitely doesn’t hurt your finances as much as a consumer proposal or bankruptcy.
Alternatives (Potentially Better)
- Credit Counselling: Get free advice from credit counselling non-profit, like Consolidated Credit of Canada. They will analyze your situation and tell you whether consolidating is your best move.
- Debt Management Plans (DMPs): Structured repayment plans. Again, these can be designed by a credit/debt counsellor.
- Bankruptcy: A last resort option, seriously. Don’t go this route unless you’ve talked to a counsellor and have exhausted all possible options.
FAQ
Q: What are the benefits of debt consolidation? A: Potential benefits include lower interest rates, smaller or simplified payments (one payment instead of multiple), and improved credit scores over time (conditional to on-time payments).
Q: What are the drawbacks of debt consolidation? A: Potential drawbacks include temporary credit score impacts, fees associated with the consolidation loan, and the risk of not qualifying for a new loan.
Q: How do I find a reputable debt consolidation company in Canada? A: Look for debt consolidation companies or credit counselling non-profits that are licensed and accredited by relevant organizations. You can also read online reviews. Or even seek recommendations from friends or family. Personalized advice is often best!
Q: What are the costs associated with debt consolidation? A: Fees can vary depending on the company and your specific situation. Some companies may charge upfront fees or ongoing monthly charges. Others may charge nothing until you accept your new debt consolidation terms. They will then take a cut from each monthly payment.
Q: How long does it take to repay a consolidated debt? A: It depends. The repayment period varies based on the terms of your consolidation loan and your monthly payments.
Q: Can debt consolidation help me avoid bankruptcy? A: In some cases, debt consolidation can be a viable bankruptcy alternative, but not always. It’s helpful to consult with a financial advisor or credit counsellor to determine the best course of action.
Q: What should I consider before choosing a debt consolidation plan? A: Before choosing a debt consolidation plan, consider several factors including the proposed interest rate, associated fees, repayment terms and conditions, and the company’s reputation. Consider all your options. Treat this the same way you would any other important financial decision. Speak to a debt counsellor like Consolidated Credit Canada before making a decision. They may be able to get different terms or find you better alternatives.
