Debt has a funny way of sneaking up on you. At first, you may not even notice that you’re running a balance on your credit cards or failing to stay current on your unsecured personal loan. As your balances grow larger each month and eventually become impossible to ignore, you may be able to hang on and barely avoid defaulting on your obligations by continuing to make your minimum monthly payments on time.
Minimum monthly payments tend to be low for a reason: Your creditors want you to be able to pay them so that they can continue to rake in the interest that your account generates. While the laws governing interest rates vary somewhat by province, you’ll lose roughly the same amount each year to interest whether you live in Nova Scotia or British Columbia.
If you’re running a balance of $10,000 at an average interest rate of 18 percent, you’ll pay $1,800 per year in interest charges alone. If you miss a payment and start to accrue late fines and penalty interest, your annual outlay will increase to eye-popping levels. This is clearly unsustainable.
Fortunately, there are several tried-and-true ways to escape from debt trouble. Debt consolidation loans, which provide you with enough cash to pay off your creditors immediately, are among the most popular.
You’ll start feeling a lot better as soon as you’ve signed for your loan. Once you’ve used the proceeds to pay off your creditors and silence the threatening phone calls from their collection departments, you’ll probably feel like you’re on vacation.
Of course, reality will come flooding back in as soon as you receive the first monthly statement on your loan. While they may lower your effective interest rate by a few percentage points, debt consolidation loans do nothing to reduce the principal amount of your debt.
You might appreciate a product that can slash your interest rate from 18 percent to 10 percent and save you $800 per year on a $10,000 debt load, but debt consolidation loans come with plenty of other caveats too.
First, they’re credit-sensitive. If you have poor credit, potential lenders will either deny your application outright or saddle your loan with an exorbitant interest rate that rivals the current APR on your past-due credit card. You may be able to secure a better rate on your loan if you have mediocre credit, but you’ll still pay a hefty premium relative to other types of credit products.
Your ability to secure a debt consolidation loan may also depend upon your location. Whereas credit still flows freely in economically-vibrant areas like Alberta and Saskatchewan, few banks in depressed areas like northern Ontario and Quebec are willing to make risky unsecured loans anymore.
It’s important to remember that taking out a debt consolidation loan doesn’t guarantee you a clear path towards debt-free living. Any move to consolidate your debts must be paired with a hefty dose of self-discipline: You’ll need to cancel or hide your credit cards to avoid the temptation to rack up new debts on them, use cash or debit for everyday purchases, and stick to a household budget that eschews destructive impulse purchases.
Finally, finance companies from New Brunswick to Manitoba prefer to keep high-risk debt consolidation loan customers on short leashes. If you fail to adhere faithfully to the pre-set repayment schedule set out in your loan agreement, you’ll quickly find yourself in arrears.
Unlike credit card companies, which actually prefer that their customers run credit balances, consolidation loan providers view even a single missed payment as a serious transgression. Make sure that you can comfortably afford your loan before you agree to its terms.
If debt consolidation loans are too risky for your taste, opt for debt settlement instead. Unlike other forms of credit relief, debt settlement can guide you out of debt in anywhere from one to four years without permanently damaging your credit score. While every situation is unique, it’s not uncommon for debt settlement customers to shave 40 to 60 percent off of their outstanding debts. In other words, you may be able to walk away from a $10,000 debt with a single payment of just $5,000.
From Newfoundland to British Columbia, debt consolidation loans are a popular and useful form of credit relief. While they offer plenty of advantages, they come with some serious caveats as well. Before taking out a potentially ruinous loan to get a handle on your debts, shop different lenders for the best possible rate and determine whether you’ll be able to afford your new monthly payments.
Alternatively, talk to a debt settlement professional and start negotiating a deal with your creditors. You’ll save thousands and be able to begin planning for life after debt sooner than you ever thought possible!