Debt consolidation can take many forms. Choosing the right approach to consolidating your debt begins with understanding your needs and defining what you are trying to achieve. Here are 5 key objectives most people consider when looking to consolidate their debts.
Identify Your Debt Consolidation Needs
1. Lower Interest Rates
If you are able to repay your debt but are paying high credit card interest rates, then your first objective will be to lower your interest costs. By getting a new debt consolidation loan at a lower rate you will save money that can be used to pay off your debt sooner or be put towards other living expenses.
2. Lower Payments
Next consider your monthly payment needs. What can you afford to pay? Do you need to lower your monthly debt payments in order to make ends meet each month or can you apply extra towards paying off your debts sooner?
3. Simplify Money Management
If you have more than one debt, you may be looking for ways to consolidate several existing loans into one monthly payment making it easier for you to keep up with your debt payments.
4. Debt Relief
If you do not qualify for a debt consolidation loan, or your debts are more than you are able to repay, you may be looking for some form of principal reduction.
5. Creditor Protection
If you are being harassed by calls from creditors or are facing the possibility of a wage garnishment, protection from your creditors will be a top priority.
In the table below, we compare how different debt consolidation programs can help you achieve your priorities.
|Objective||Debt Consolidation Loan||Debt Management Plan||Consumer Proposal|
|Lower Interest Rates||Yes||Often, sometime interest free period||Yes – Interest freeze, no interest after filing|
|Lower Payment||Sometimes. You can choose to reduce your monthly payment or pay off your debt sooner||Usually although you could choose to pay off your debts sooner by increasing your payment||Yes|
|Single Monthly Payment||Depending upon what debts you consolidate||For debts you choose to include in the plan||Yes – all unsecured debts automatically included|
|Debt Relief or Debt Reduction||No||Full Principal Repayment required but relief from interest is possible||Yes – debts are settled for partial payment and interest is frozen at time of filing|
As you can see, while all options allow you to consolidate your debts, which program you need will depend on your priorities. Some questions to ask yourself or your debt consultant to help you choose:
- Do you qualify for a debt consolidation loan? If your debts are more than you can afford or you do not have adequate collateral you may need to consider a Debt Management Plan or Consumer Proposal.
- Can you afford to repay your debt in full or do you have only one or two small creditors to deal with? If so, then consider Credit Counselling as a start.
- Do you need relief from principal as well as interest and penalties. If so, then a Consumer Proposal may be a better option for you.
- Do you need protection from collection calls or a wage garnishment. Again, a Consumer Proposal (or if necessary bankruptcy) may be a better solution.
For a free, no-obligation consultation with a professional, accredited debt consultant, contact an advisor today.