Debt Consolidation Guide: Strategies for Managing Debt

Consolidation Loans: The Facts

We’ve all heard about debt consolidation loans. At first glance, the concept of taking out a brand new loan to “consolidate” or combine a bunch of old loans and credit card debts into one easy monthly payment sounds like a terrific idea. Until you take the time to crunch the numbers and slowly realize what that loan is actually costing you. Then a consolidation frequently becomes a very BAD idea.

Consolidation loans can be especially troublesome when we use the loan to pay off existing debt and then continue to use the same credit cards or lines of credit to rack up new debt. The end result: Double the amount of debt, double the amount of financial pressure.

Torontonians Have Out-Of-Control Personal Debt

If you live in the city of Toronto it’s very likely you have some debt worries. To prove this point, just last month the Toronto Star reported that the The average homeowner in Toronto carries approximately $40,000 of personal debt and that the debt-to-income ratio for Torontonians has increased from 88% a decade ago to a record 150% this year. What do these figures translate into? They mean the average Toronto family is dealing with a debt load that is higher than their average net annual take-home pay. It’s a form of financial dog-paddling that results in little reduction in the principal amount owing and eventual increases in the overall debt due to interest calculations.

The Toronto Star article continued its doom-and-gloom forecast by pointing out that when a consumer is granted credit based on his or her ability to only manage the minimum in interest payments, the consumer then becomes permanently indebted to that financial institution. Then all it takes are even slight changes in the life of the household (such as illness, injury, or loss of employment) to send many of us into a financial tailspin. We’re basically living and working to pay the interest fees on our loans and credit cards!

Outside Toronto, in the rest of the province, the debt issues may not be as extreme, but they are still problematic. An increase in unemployment due to factory and warehouse closures in parts of Ontario has resulted in thousands of families who struggle daily to keep their homes and lives afloat.

Consolidation Loans – The Harsh Reality

These types of debt worries are why so many Ontarians are eager to obtain debt consolidation loans to clear up their debt problems. You’ve probably turned on your television or your radio lately and viewed (or heard) an advertisement by a consolidation loan firm. They’re the folks offering low-cost home equity and personal loans that promise to help you pay off your rising debt load.

But what’s the reality of these types of deals? Well, first off you need some sort of security to pledge (such as your home or your fairly-new vehicle) in order for you to “secure” the loan. On top of that, many of these consolidators will only advance you a sum up to a maximum of $20,000 – which might not make much of a dent in that pile of debts you’ve been stressing about, if the Toronto Star and other media are accurately reporting on the state of debt in our city are to be believed. My own experiences with the clients I see mirror what the Star article claims, and in many cases the household debt is above $50,000. That’s a lot of debt to be worrying about.

Despite what many debt consolidators will tell you, the actual rate of interest you will be paying for the typical consolidation loan is well above prime – especially if you already have a damaged credit rating or your debt to income ratio is too high. The worse your credit rating, the more you will end up having to pay. And the harder it will be, over time, to get rid of that new debt that was obtained to get rid of your old debts! If you have fluctuating income, or one spouse has been unemployed for a long period of time, a consolidation loan may look like the perfect antidote to debt pressures. Unfortunately, without stable employment a consolidator will be unlikely to consider a loan for anyone in this situation. Or, if they do provide such a loan it will be at such a high rate of interest that it just doesn’t make sense to proceed.

In addition to the interest rate attached to the consolidation loan, consolidators make their money in one other way: administration fees. It’s not unusual for a consolidation loan to come with an up-front fee tacked on of anywhere from $1,000 or more (sometimes as high as $6,000 a loan, depending on the size of the principal amount loaned out and the length of the loan period). You’ll need to add this amount on to the loan itself to see what that consolidation is REALLY costing you – it could turn out to be far more than you could have imagined once you calculate in all of the fees involved.

The Smarter Solution: A Consumer Proposal

Rather than go further into debt by arranging a consolidation loan, consider instead a consumer proposal. Proposals are used by debtors who cannot meet their obligations but wish to make a settlement with their creditors and avoid bankruptcy. First, you work with a federally licensed Trustee to determine how much you owe, how much you can afford to pay towards your debt each month, and how long it will take you to pay it off. Then the Trustee submits your proposal to your creditors. If the required majority of your creditors accept the offer, then all your unsecured creditors are obliged by law to also accept the offer.

Here’s another benefit: filing a Proposal immediately stops all collection efforts and legal actions by your creditors, including lawsuits, asset seizures, and wage garnishments, without having to file for bankruptcy. This type of debt relief is an excellent alternative to a consolidation or home equity loan.

If you’ve been having difficulty arranging for a debt consolidation loan and are desperate to deal with your rising debt load, consider a Consumer Proposal as a solution to your debt problems. We can provide you with a free consultation at one of our 50+ offices, so you can discuss your concerns with us and we can work together to find you the right solution.