Debt consolidation refers to the act of taking a fixed-interest loan to consolidate high interest loans and credit cards at a low interest rate. This is done to make debt management and servicing easier and payment more affordable.
Businesses and persons with credit problems usually resort to debt consolidation, i.e. borrowers who have student loans, auto loans, maxed out credit cards, etc. Such borrowers resort to debt consolidation to combine multiple debts into one unsecured or secured loan. In most cases, financial institutions in Canada require the provision of collateral, which is most commonly real estate. A mortgage may be secured against some property (a house) for the purpose of collateralization. By collateralizing, the borrower agrees to pay off the loan or the financial institution may proceed with the forced sale of the asset used as collateral. This helps reduce the risk lenders take, especially when dealing with borrowers with no or limited credit exposure. They, on the other hand, are able to obtain a lower interest rate.
Some experts recommend debt consolidation for persons who are paying multiple high-interest credit card debts. Many credit cards go with a higher interest rate than other borrowing solutions such as unsecured loans. Persons who have some asset to pledge as collateral (an automobile or home) can use it to obtain a secured loan. The cash flow and interest that go toward debt repayment are lower, making it possible to pay off the debt without incurring more interest.
Consolidation loans offer some benefits to overburdened borrowers in Canada, one being that they are accountable to one financial institution only. Borrowers who choose a longer repayment period pay their loan over a longer term, thus lowering the amount of their monthly payments. The loan takes longer to repay, but many debtors are able to meet their payments comfortably. If the interest rate offered on the new debt is considerably lower than that on the original debts, this can save the borrower a lot of money in interest payments. Debt consolidation is also beneficial in that it prevents borrowers from falling behind on payments, which can affect their credit standing even further.
Debt consolidation has some downsides as well, and one is that the new loan comes with additional charges for setting up and repayment. Second, if the borrower is unable to make payments, coming to a new arrangement with one financial institution can be more difficult than negotiating with multiple lenders. Borrowers with a compromised credit score are often offered a loan with a high interest rate, which does not make repayment easier. Those who include only some of their loans will have a new loan to repay on top of their existing debts. Finally, borrowers who offer their home as collateral are at risk of repossession in case of default.
Then, which debts are priority debts to pay first? The debts to include in a consolidation loan are not necessarily the larger ones. Priority debts are those where some institution can take a serious action against the borrower in case of failure to keep up with payments. Child support payments and secured loans are two examples. Non-priority debts include money borrowed from family and friends, payday loans, unsecured personal loans, and credit cards.
Before deciding on a debt consolidation loan, it may be worth to explore alternatives such as making new arrangements with one’s creditors. Another option is to check whether the credit options available can be used in a better way. These include personal loans, store and credit cards, an overdraft facility, and an extension to a mortgage loan. A third option is to borrow money from relatives, if possible.
Different financial institutions in Canada offer consolidation loans, including the big banks. It pays to look at more than one offer and make sure the terms are agreeable. One factor to pay attention to is the interest rate (fixed or variable) and whether it can change. Another is the amount of the monthly payment and the penalties for missed payments. A third factor is whether there are costs or penalties for early prepayment. Finally, it is important to find out what options there are in case of default when the loan is secured.
The big banks in Canada offer consolidation loans, including RBC Royal Bank, Bank of Montreal, and others. Clients of the Royal Bank of Canada can apply for a RBC debt consolidation loan at the bank’s Quebec branches, Manitoba branches, Nova Scotia offices, and elsewhere. Debt consolidation loans offered by the bank help borrowers lower their debt and save money on interest payments. They can consolidate different borrowing options under a personal loan, which goes with a set schedule of payments and an attractive interest rate. The Bank of Montreal offers BMO debt consolidation loans in the form of home equity loan plans and personal loan plans. The home equity loan plan is offered to homeowners who borrow against the equity in their home. These plans are featured with lower monthly payments and longer repayment periods. In essence, this product is a fixed-rate installment loan. The Canadian Imperial Bank of Commerce offers CIBC secured debt consolidation loans to borrowers who have auto loans, credit card debt, and other loans that are difficult to pay off. Clients of the bank can choose from taking a line of credit, a home equity loan, or a debt consolidation mortgage. Homeowners can opt for a debt consolidation mortgage to consolidate some of their high-interest debts. This mortgage is a way to refinance an existing mortgage and borrow additional money to consolidate multiple debts. The CIBC debt consolidation mortgage is a structured payment plan that helps borrowers make a budget and manage their finances.
Unsecured debt consolidation loans are loans that are not tied to any asset. Thus, the borrower does not have to offer collateral. Borrowers take less risk in this way because they do not risk losing some valuable asset on default. Most financial institutions, however, are unwilling to offer unsecured debt consolidation loans. The Bank of Montreal, for example, offers the BMO personal loan plan, which is an installment plan, with payments to be made within a fixed period of time. Clients are allowed to choose their repayment period and can opt for a variable or fixed interest rate.
One way to reduce credit card debt is to move high-interest balances to a credit card with a low interest rate. For example, borrowers who have around $250 on each credit card, with interest rates between 15 percent and 25 percent may transfer these balances to a single credit card with a 5 percent interest rate. The money saved on interest payments can go toward paying off the balance. Another way to reduce credit card debt is to consolidate multiple debts using a HELOC. Home equity lines of credit are offered with low interest rates, making it possible to pay off the outstanding balance. Credit card debt consolidation loans are a third option available to borrowers who seek to combine high-interest credit card debts into a single loan with a lower rate of interest. Taking a credit card debt consolidation loan is beneficial in a number of ways. First, Canadian borrowers who opt for consolidation loans are able to pay down the outstanding balance, paying less in interest. Second, financial institutions offer customer discounts, meaning that borrowers will pay even less in interest. Third, this is a good way to stop over limit and late fees, which add up to the amount owed.
Credit card debt consolidation lowers the borrower’s monthly cost of credit by extending the term of the loan. However, borrowers are sometimes required to offer collateral to consolidate their credit card debts.
Student debt consolidation loans are a way to consolidate college loans and lower the monthly payments. At the same time, students who choose this option stretch the life of the loan, adding on thousands of dollars in interest. For instance, students who have a 10-year loan and stretch out the life of the loan to 20 years will reduce their monthly payments by over 30 percent. However, they will pay double this amount in interest charges in the long run. The good news is that there are ways to lower the interest rate, and the most important step is to improve one’s credit score. Students who opt for debt consolidation usually have limited credit histories but an impressive employment history and 3 or 4 years of regular monthly payments can boost one’s credit score by around 100 points or more. This, on the other hand, makes it easier to persuade financial institutions to lower the interest rate on a student debt consolidation loan.
In any case, there are some important questions to ask debt consolidation companies. One is whether they charge origination fees and prepayment penalties. Other questions relate to the life of the loan and the maximum interest rate.
Borrowers who want to consolidate their debts may consider applying for a personal loan. Personal loans are offered to Canadian borrowers who need money for home improvement projects, unexpected expenses, debt consolidation, and more. Different financial institutions in Canada offer personal loans to borrowers who seek to consolidate debt. The Canadian Imperial Bank of Commerce is one bank to look into, and clients of the bank can apply for a CIBC personal loan to invest, buy furniture, or consolidate high interest debt. Personal loans offered by CIBC are secured against assets or home equity. Borrowers can pay off their loan at any time or they can choose to pay a portion of it. Making more frequent payments helps reduce the interest costs. RBC Royal Bank is another bank that offers personal loans for debt consolidation purposes. Borrowers enjoy an attractive interest rate and a set payment schedule that helps them pay down multiple debts.
Debt settlement is one alternative to personal loans and loans for people with bad credit. Borrowers in Toronto, debtors in Ottawa, bank clients in Winnipeg and elsewhere in the country can opt for debt settlement. In essence, debt settlement, known as debt negotiation, debt arbitration, and credit settlement, is a debt reduction method whereby the lender and debtor agree the debt to be settled for less than its amount. For example, the borrower owes $15,000, but the lender agrees to settle the debt for $9,000 if this amount is paid off in 1 week. With debt settlement, clients make monthly payments, and the debt consolidator takes its fees for the negotiation and legal work out of these payments, after which they are passed to the lender. The debt settlement procedure is considered successful when the financial institution agrees to forgive a certain portion of the outstanding balance.
What debts to include? Debt settlement usually involves unsecured debts and not debts secured by assets and real estate. Mortgages, auto loans, and student loans cannot be settled. Nevertheless, debt settlement offers some benefits, one being that the debt is satisfied in full for less than the full amount. This saves borrowers a lot of money. Some collection agencies are willing to delete any negative information that shows up on the borrower’s credit report. Moreover, debts that are resolved through debt settlement or another procedure are not subject to legal action and collection calls. On the downside, debts may show up on the borrower’s credit report as settled and not as paid in full. Borrowers are advised to obtain a written statement from the collection agency, stating that they do not owe anything. Otherwise, the collection agency may sell the debt to another collector.
Some borrowers in Canada use the services of debt consolidation companies, but this may cause even more problems. Some of these companies charge monthly fees and hefty upfront fees but pass nothing to the lender until the borrower has accumulated enough money to settle. Such debt settlement companies may even take a percentage of the forgiven debt in the form of a fee. Borrowers who decide to settle are advised to try to do that by themselves. The most important thing is to save an amount of money that is large enough to pay off the settled amount. This is done in one lump sum payment. Collection agencies do not accept payments. Most collection agencies will settle for 40 to 60 percent of the balance, but some may agree to settle for as little as 25 percent.
Finally, when is debt settlement a good solution? Borrowers usually resort to debt settlement when they are hounded by collection agencies or their accounts have been charged off.
Bankruptcy is one alternative to debt consolidation and debt settlement available to Canadian borrowers. Bankruptcy legislation in Canada is designed in such a way as to give persons who are overburdened with debt the opportunity to start fresh by freeing themselves of debt. A debtor has to be insolvent in order to declare bankruptcy. To be insolvent means that the debtor is unable to service his debts and owes $1,000 or more.
Bankruptcies and proposals are administered by a trustee in bankruptcy who manages the assets held in trust. Trustees in bankruptcy offer debtors advice and information on the bankruptcy and proposal process, ensuring that the rights of the creditor and debtor are protected and respected.
The good news is that the borrower’s spouse, whether married or common law is not affected unless they are responsible for the debt incurred (i.e. they have signed a contract or agreement for any of the debt). If they have a personal credit card, they are responsible for paying off the balance. However, bankruptcy will not affect the spouse’s credit standing, and they will keep all assets that are in their name. In case one’s spouse has debt or is responsible for any of the debt jointly incurred, they may have to declare bankruptcy as well.
The territories and provinces in Canada have different regulations regarding assets exempt from seizure. Debtors in Manitoba, borrowers in Alberta, those in Ontario, and elsewhere are advised to check the regulations regarding how much they are allowed to keep. Borrowers in Alberta, for example, can keep the food required for the debtor’s family over the next twelve months, household furniture, dental and medical aids, necessary clothing, etc. All personal property, including books, equipment, and tools, required to earn a living and up to $10,000, is exempt from seizure. In addition, Registered Retirement Income Funds, Registered Retirement Savings Plans, and Deferred Profit Sharing Plans are exempt from seizure. Borrowers in Quebec can keep all movable property that is necessary and used by the debtor and his family, up to $6,000. They can keep all clothing, linen, food, and fuel, required for the life of the household. Medals, portraits, family papers, and other decorations are exempt from seizure as well.