As the holiday season approaches, you may be thinking that a debt consolidation loan is a good idea so that you don’t face the New Year with maxed out credit cards and a budget that is stretched to its limit. There are so many services out there that offer debt consolidation options, but what is most important is that you fully understand each option and what it means to your personal finances and your credit.
Understanding your options starts with understanding who is offering you the option, so this article will outline Canadian debt consolidation options and what they really mean to you.
Your first thought may be to approach your bank for a debt consolidation. If you qualify, banks will often recommend a personal line of credit or a large credit card to consolidate your debt. The interest could range anywhere from 7% to 25%. The problem with this type of debt consolidation loan is that your budget may only have room to manage the minimum payment. If you don’t have the income to make massive lump sum payments, this type of debt consolidation loan may prove to be very difficult to pay off. Banks will usually calculate your minimum payment based on 1% to 3% of your balance, which usually only covers interest. If you get into the habit of only making minimum monthly payments, you will see no end to your debt.
Bankruptcy trustees also offer Canadian debt consolidation options. The challenge is that trustees in bankruptcy represent your creditors. A debt consolidation option offered through a trustee in bankruptcy may offer you the debt relief you need. With that said, a consumer proposal or bankruptcy is not a debt consolidation loan. If you go directly to a trustee in bankruptcy, the consolidation that is arranged will often give preference to your creditor which ultimately means you pay more.
Credit counselling agencies that offer Canadian debt consolidation options may be not for profit, however, they obtain most of their financing from the banks. This is by far the least favourable debt consolidation option because it not only destroys your credit, but it also involves paying off your debt over a long period of time. Not for profit credit counselling is really the best option only for consumers who owe less than $6,000 in debt.
Mortgage Agents will often promote debt consolidation options that involve mortgage refinancing. After legal fees, appraisal fees, broker fees and administration fees, this can prove to be the most expensive type of debt consolidation loan.
At the end of the day, if you are drowning in debt, the only way out may be through a debt consolidation loan. The type of debt consolidation that is right for you will depend on your how much debt you are in, the type of debt, your income, income type and assets. You will secure the best deal that makes the most sense for you by working with a skilled Financial Advisor, one who can help you determine the type of debt consolidation loan that best suits your personal financial situation.