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Debt consolidation is a popular debt relief option. As such, most of the information contained here will be familiar to you. However, there are some myths around debt consolidation that will need to addressed if you’re truly going to weigh your options.
A consolidation loan works by your creditor buying off your principal debt from your other lenders and then charging you interest on the single lump sum. The interest rate is usually around 12 percent but can go as high as 55% if your credit score is too low. Alternatively, you may need to secure the loan to asset, like a Home Equity Line of Credit (HELOC). Another consolidation tactic is to leverage a low-interest credit card that has little or no balance transfer fee to move your debt to a more favourable card.
This is a great solution for those who have had financial challenges (a family emergency for example) and have had to max out their credit cards. In this instance, your credit score may still be high and your chance for approval for a reduced rate and consolidation are high.
In cases where you are perpetually paying off the interest on your loans, this can also be a great solution. The consolidation and lower interest rate may enable you to get to paying off some of the principal debt and even give you an end date for your debt.
One of the biggest myths around debt consolidation is that it is easy to get approved for. Often, clients will already have a significant amount of debt and may be close to, or already overleveraged. To approve the loan, you have to have enough income for the additional credit and then you can move it over to your bank. If your debt utilization is already high (which it often is if you’re considering debt consolidation) your chances of getting approved are slim. This would still be a hit on your credit score narrowing your options even further.
Another myth is around debt settlement. Some companies offer debt settlement as a way to scam consumers. In these cases, companies will offer to reduce your debt and then charge you a fee for their work where they negotiate with your creditors. Unless it is a consumer proposal with a Licenced Insolvency Trustee (LIT), there is no guarantee in negotiating your debt and an LIT will always charge you after finalizing. Though it is possible to renegotiate terms for your credit cards and other debts, a Consumer Proposal and Bankruptcy are the only processes that take into account your actual income and assets. Any other ‘program’ is by the grace of your creditor.
