Consolidating Debt

At best, the future looks uncertain for the average Canadian: Few full-time jobs have been created during the past half-decade, and the cost of basic staples continues to rise at an alarming rate. Regular folks everywhere are tightening their belts, raiding their meager savings and maxing out their credit cards just to maintain their modest standards of living.

Unless you’re lucky enough to work in the oilfields of Alberta or Saskatchewan, you’ve probably been doing the same. It’s obviously unsustainable to rack up thousands of dollars worth of credit card debt without a clear plan to pay for it, but the brutal economy presents no alternative.

Fortunately, there are several ways to control and eventually eliminate your debt without taking the drastic step of declaring bankruptcy.

You’ve probably seen billboard or bus stop ads for debt consolidation loan providers. Many of these outfits are well-funded, reaching thousands of struggling consumers across Canada. Since their business model is intuitive and appears to produce immediate results, their popularity continues to increase with borrowers from Quebec to British Columbia.

While many mainstream financial institutions offer credit facilities designed to consolidate their clients’ existing debts, most of the companies that issue debt consolidation loans are highly specialized. If you enlist the services of one of these niche providers, it’s unlikely that you’ll have to compete for their attention with other types of customers.

Debt consolidation loans are typically large enough to pay off your entire basket of outstanding debts in a single go. To reduce the risk that you’ll take some of their money and run, loan providers generally pay your creditors directly. Once that’s done, they’ll send you a bill each month to cover the principal and interest on your new loan.

This loan reduces your monthly credit-management workload by consolidating your debts into a single credit facility that saves you time and stress. Whether it’ll save you meaningful amounts of money is less clear.

At an annual rate of 18 percent, an outstanding credit card balance of $10,000 costs you $1,800 per year in interest charges. You may be able to secure a debt consolidation loan at just 10 percent if your credit is solid and you live in an vibrant province like British Columbia or Manitoba. In this case, you’d save $4,000 over the standard five-year term of your consolidation loan.

However, these results aren’t typical. In depressed areas in northern Quebec and along the periphery of Ontario’s Golden Horseshoe, credit remains tight, and you may find it difficult to secure a debt consolidation loan at all. If you have poor credit, you’ll have trouble finding a willing lender no matter where you live.

Credit counseling services take a more direct approach to the debt consolidating process. They don’t pay off your existing debts directly and saddle you with another expensive obligation. Instead, they negotiate one-on-one with your creditors to reduce the interest charges on each of your loans.

While most of Canada’s credit counseling outfits are technically not-for-profit businesses, many are quietly funded by big banks and credit card companies. This inherent conflict of interest raises important questions about their motivations.

These firms can also be quite expensive, charging monthly “maintenance fees” for the privilege of keeping your account active. Over the five to seven years that it takes to work through a typical credit counseling process, the sum of these seemingly small debits can easily exceed $2,000.

Your credit counselor may strong-arm your creditors into offering more favorable interest rates on your existing balances, but they won’t be able to reduce the principal on your debts. By contrast, debt settlement providers are known for hard-nosed negotiating tactics that produce real debt-reduction results.

Like bankruptcy, the debt settlement process can dramatically reduce the amount that you owe your creditors in as little as 12 to 48 months. While every case is different, it’s not unusual for Canadian creditors to settle for just 40 to 60 percent of their clients’ balances.

In other words, your debt settlement provider may be able to halve your debt burden in as little as 12 months.

Unlike bankruptcy, settling your debts won’t damage your credit score on a permanent basis. Since it guarantees that they’ll recoup at least part of their investment, creditors prefer that their clients choose debt settlement over bankruptcy. Going forward, they’ll be more likely to lend to those who do.

Before you do something drastic and put your financial future at risk, consider the debt consolidation options at your disposal. Debt consolidation loans, credit counseling and debt settlement are all preferable to the financial oblivion of bankruptcy.

Carefully consider your unique mix of debts and choose the option that’s right for you. With luck, you’ll find yourself on the road to financial freedom before long.