Debt Consolidation Loan – A Good Way To Pay Off Debt?

The past few years have not been kind to Canada’s economy. Unlike its southern neighbor, the country avoided a direct hit from the recent financial crisis, but the recession that followed dramatically reduced global demand for the raw materials and finished products for which Canada is known. From the industrial cities of Ontario to the oilfields of Alberta, much production capacity now lies idle, and thousands of once-proud workers struggle to find menial employment in unfamiliar workplaces.

The difficult economy has created a parallel problem that’s just as unfamiliar to most Canadians: crushing debt. As real wages decline across the country, more and more families are being forced to rack up serious credit card balances in order to keep their homes warm and stocked with basic food staples.

If you’re struggling along under a suffocating debt burden, don’t panic. Digging yourself out of debt won’t be easy, but you have several clear options for doing so at your disposal.

Whether you live in Nova Scotia, British Columbia or anywhere in between, you’ll need to weigh your options against the size and cost of your debt as well as your own personal needs. Once you’ve gotten a grip on your predicament, choose the debt relief strategy that’s best for you and begin blazing your way out of trouble.

Your first thought may be to take out a debt consolidation loan and pay off all of your existing debts in one fell swoop.

At first, the typical debt consolidation loan seems like a straightforward arrangement. Lenders make these loans with the expectation that they’ll be used to repay credit card balances, outstanding personal loans and other big unsecured debts. In fact, your debt consolidation lender will generally make these payments directly unless your credit score is unusually strong. From your lender’s perspective, this eliminates some uncertainty from the process and guarantees that you won’t use part of your loan to make an unwise impulse purchase.

Once your existing debts have been paid in full, you’ll be responsible for a single monthly payment on your debt consolidation loan. In addition to being far more convenient than juggling multiple smaller credit card bills, this arrangement has the potential to save you hundreds of dollars per year in redundant interest charges.

If you’re currently paying an average rate of 20 percent on a $10,000 basket of unsecured debts, your interest payments alone are costing you $2,000 per year. That’s equivalent to the standard down payment on a mid-sized car!

Although its exact rate will depend on factors like your credit score and province of residence, your debt consolidation loan might carry an annual interest charge of 10 to 12 percent. On a balance of $10,000, that’s good enough for savings of $800 to $1,000 per year.

While this sounds like a good deal, it’s important to remember that lenders don’t take debt consolidation loans lightly. Unless you have better-than-average credit, you can expect the premium that you pay for your loan to negate any perceived financial benefits. In hard-hit places like Newfoundland or northern Ontario, you may be unable to secure one at all.

What’s more, most lenders place onerous restrictions on these products. Whereas your credit card issuers are only too happy to let you run a balance on your account and fork over small monthly payments comprised mostly of interest, debt consolidation lenders take a different approach to credit.

If your lender’s contract prohibits late or partial payments, make sure that you can afford your monthly bill before agreeing to take on the loan. Defaulting on a debt consolidation loan can have serious, long-lasting repercussions for your financial reputation.

Compared to consolidation loans, debt settlement offers a lower-key, results-oriented approach to debt relief. Unlike costly loans or opaque credit counseling services, the debt settlement process is designed to reduce the principal balances on your outstanding obligations. It’s by far the most cost-effective debt relief solution, reducing past Canadian customers’ debts by an average of 40 to 60 percent.

Since the debt settlement process is likely to shave thousands of dollars off the top of your debt load and stop the remaining balance from accruing interest, you’ll also find it to be substantially less time-intensive than loans or counseling. Depending upon your creditors’ willingness to negotiate, debt settlement typically takes 12 to 48 months from start to finish.

While the debt settlement process isn’t perfect, it’s the only realistic debt relief solution that’s able to reduce the total amount that you owe your creditors. Of course, the scope of your financial troubles and your own personal needs will ultimately determine which course of action is right for you. Choose your next move wisely: If you make the right decision, you may wake up debt-free sooner than you think.


How To Get Out Of Debt

From Newfoundland to Alberta, you’re just one of the millions of Canadians who have effectively borrowed from their future selves to pay for basic necessities in the here and now. Many see no problem with doing this. After all, the past is full of examples of folks who have worked their way out of serious personal debt problems through determination and discipline.

However, you shouldn’t necessarily expect your case to follow suit. Every debt situation is different: If you have poor credit, high credit card balances, and crushing interest rates that seem to negate your monthly payments, you may not be able to escape from debt by yourself.

Fortunately, you don’t have to learn how to consolidate your debt on your own. Once you’ve made the decision to pay off your obligations and get your finances back on track, you’ll have several options.

There are four major types of credit relief: debt consolidation loans, bankruptcy, credit counseling and debt settlement. Depending on the mix of debts that you’ve built for yourself, any one of these options may prove to be the answer to your financial puzzle.

From Quebec to British Columbia, debt consolidation loans are Canadians’ most popular debt relief choice. When you take out a debt consolidation loan, you’re making a bargain: Since the loan’s principal is usually large enough to cover your existing obligations in full, your lender will expect you to pay off your current creditors immediately upon receipt of the loan. Once that’s done, you’ll be responsible for making a single monthly payment to your debt consolidation lender until you’ve paid off the new loan in full.

It’s helpful to think of your debt consolidation loan as a refinancing tool. If you’re barely able to afford the monthly payments on your existing lines of credit, your balances are probably accruing interest at unseemly rates. If you’ve missed payments in the past, you may be on the hook for penalty interest, late fees and other charges as well.

Debt consolidation loans may lower your interest rate significantly, especially if you’re in the penalty. This can translate into big savings: Reducing the 20 percent effective interest rate on a balance of $10,000 to 10 percent will save you $1,000 per year. As debt consolidation loans typically take five years or more to repay in full, your total savings may exceed $5,000.

These products come with some drawbacks. For one, your debt consolidation lender can’t reduce the principal amount that you owe your existing creditors: If you owed $10,000 before you took out your loan, you’ll owe $10,000 after you take out your loan. They can also be hard to come by: If your credit score is below average, debt consolidation lenders will either turn you away outright or ask you to pay through the nose for your cash.

If you’ve tried using a debt consolidation loan to solve your financial problems and still can’t figure out how to consolidate your debt, you may need to consider filing for bankruptcy. If you do, your creditors will stop harassing you almost immediately, you’ll see most or all of your debts forgiven, and you’ll be able to start from scratch with a tighter budget.

However, bankruptcy can cause serious headaches. Unless you don’t own much, you’ll exit the process with fewer assets and a rock-bottom credit score. It can take years to rebuild your financial reputation after bankruptcy, so it’s best to exhaust all other options before taking the plunge.

Credit counseling should be one of those options. While your credit counselor can’t reduce the principal on your outstanding loans, they can negotiate sharp reductions in your annual interest rates. They have a vested interest in keeping you solvent: Since they receive much of their funding from banks and credit card companies, they don’t want you to default on your loans and rob their benefactors of thousands of dollars.

Unfortunately, a successful credit counseling program can take five to seven years to complete. If you’re wondering how to get out of debt sooner than that, look to debt settlement. Depending on the size of your debts and your creditors’ willingness to negotiate, this process typically wraps up in 12 to 48 months.

What’s more, debt settlement providers make it their mission to negotiate actual reductions in your outstanding principal balances. The exact amount that you’ll save depends in large part on your creditors’ receptiveness to the process, but it’s not unusual for debt settlement to slash 40 to 60 percent from a typical debt load.

While there’s no magic debt-relief bullet, these four proven methods can help you escape your creditors and get your life back on track. Weigh your options carefully and make the call that best suits your needs.