Consolidating debt is one way to manage debt in British Columbia (BC). Several options are available to help you consolidate your debt, such as the following:
- Debt consolidation loan
- Debt management program (DMP)
Debt Consolidation Loans vs. Debt Management Program (DMP)
While both options allow you to combine multiple debts, there are major differences between them:
What Is A Debt Consolidation Loan?
A debt consolidation loan is a type of loan you can use to combine multiple debts into a single payment. Rather than juggling various due dates that fall on different days throughout the month and higher interest rates, you’ll have just one monthly payment, ideally at a lower interest rate.
Debt consolidation can simplify your finances and save you money in interest payments over the long haul. Many types of loans can be used for the purposes of consolidating your debt:
- Personal Loans – A personal loan is a common option to consolidate debt. They have fixed rates and offer terms of up to 5 to 10 years.
- Home Equity Loans – If you have equity in your home, you can use it to borrow a large sum of money at a low interest rate. Since home equity loans are secured against your home, interest rates are often lower than a regular personal loan, making it a great option for consolidating debt.
What’s A DMP?
A DMP is a structured repayment plan designed to help you better manage and pay down your outstanding debt. To facilitate this process, you’ll work with a credit counselling agency, which will review your financial situation and help you come up with a realistic budget.
Your credit counsellor will also negotiate with your creditors on your behalf to lower interest rates and waive fees to make it easier to repay your debt. To pay your debt, you’ll make a monthly payment to your counsellor, who will then distribute the money to your creditors.
A DMP can also include financial education and budgeting guidance to help you manage your finances and avoid future debt issues. DMPs are typically used for unsecured debts, like credit cards and unsecured personal loans. Secured debts, such as home loans and car loans, are generally not included in DMPs.
Should You Use A DMP Or Debt Consolidation Loan?
The option that would be best for you depends on your financial situation and your needs.
When Is A Debt Management Program Best For Debt Consolidation?
A DMP can be a good choice for debt consolidation in the following situations:
- You’re Paying High Interest: If you have high-interest debt that’s difficult to manage, a DMP can help you work out a plan to lower your interest rates and fees.
- You’re Drowning In Debt: If you’re struggling to keep up with all your debt payments, a DMP can help you establish a structured plan to streamline your finances.
- You Need Financial Advice: If you need help with financial literacy, a DMP may include services to help you better manage your money.
- You Want To Avoid Bankruptcy: A DMP can help you avoid bankruptcy by dealing with your debt issues before they get so bad.
When Is A Personal Loan Best For Debt Consolidation?
A personal loan may be good for debt consolidation in the following scenarios:
- You Have High Interest Debt: If you have several debts with high interest rates, and can secure a personal loan with a lower interest rate, consolidating your debt can save you money.
- You Want To Simplify Your Bills: If you’re juggling multiple debts with different due dates, consolidating into one loan may help streamline your payments.
- You Want Predictable Payments: A personal loan comes with fixed, regular payments, which can provide you with more predictability.
When Is A Home Equity Loan Best For Debt Consolidation?
A home equity loan can be ideal for debt consolidation in several scenarios:
- You Want Lower Interest Rates: Home equity loans usually offer a lower interest rate than a personal loan.
- You Have Significant Equity: If you have substantial equity in your home, it may be easier to qualify for a HELOC with favourable terms.
| Can I Get A Debt Consolidation Loan If I Have Bad Credit? You can still get a debt consolidation loan with bad credit, though it could be more difficult to qualify, and you may be charged higher interest rates. Some lenders specialize in bad credit loans, but it’s important to remember that they may be more expensive and you might not be able to qualify for larger loan amounts. |
How Much Can Debt Consolidation Save You?
The amount you can save with debt consolidation depends on various factors, such as your current interest rates, the total debt amount, and the rates and terms of the consolidation loan.
To help you understand how much you can potentially save, let’s illustrate. In the following chart, we’ll compare monthly payment amounts and total interest paid when you pay your debts separately versus consolidating them (based on a 5-year term):
| Credit Card | Personal Loan | Totals When Debts Are Separated | Totals With Debt Consolidation | |
| Total Debt | $8,000 | $15,000 | $23,000 | $23,000 |
| Interest Rate | 21.99% | 11% | 11% — 21.99% | 9% |
| Monthly Payments | $220.91 | $326.14 | $547.05 | $477.44 |
| Total Interest Paid | $5,254.35 | $4,568.18 | $9,822.53 | $5,646.53 |
As you can see, you’d be saving $69.61 in monthly payments, and $4,176 in interest over the life of the loan when you consolidate your debt.
Can I Consolidate My Debt With A Balance Transfer?
A credit card balance transfer involves moving your existing credit card debt to a new card, typically one with a lower or 0% interest rate during the introductory period. If you manage to pay down your debt during this limited time frame, you can save on interest and pay down your debt faster.
This option is particularly effective if you have high credit card debt with a high interest rate, and are able to pay it down before the promotional period ends. Once this period expires, the rate will jump up to the regular rate.
Note: There may be a balance fee that you’ll have to pay to move your credit card debt over to a new card. This fee is usually around 3% to 5% of your transfer balance. Be sure to do the math first to see if the savings outweigh these fees.
| Warning: If you don’t pay off your debt before the introductory rate expires, you’ll wind up carrying that balance forward and will be charged the regular rate on that amount. |
When Is A Balance Transfer Best For Debt Consolidation?
A balance transfer can be a great option for debt consolidation in the following situations:
- You Have High-Interest Credit Card Debt: Credit card rates tend to be quite high, which can make your balance even more difficult to repay. With a 0% or very low rate, you’ll have a chance to repay the debt without being charged interest for a limited time, allowing you to repay the debt faster and spend less on interest.
- You Have Good Credit: A good credit score may be required to qualify for balance transfer credit cards with low or 0% promotional rates.
- You Can Pay Off Your Balance: You’ll need to have the financial resources to help you pay your balance off within the promotional period before the regular rate kicks in.
Financial Help From The BC Government
Alternatives Debt Relief Solutions In BC
Ideally, you’ll address your debt issues right away and resolve your financial challenges before they worsen. Better budgeting strategies, credit counselling, and debt consolidation can help.
However, if your problems are too significant for these options, you might need to explore more drastic measures, such as debt settlement, consumer proposal, or bankruptcy. Remember, while these options can reduce or eliminate debt, they will significantly affect your credit score.
Debt Settlement
Debt settlement is a process where you negotiate with your creditors to pay an amount that’s less than the full amount you owe. You can work with a debt settlement company, who will negotiate on your behalf to settle your debt.
Your debt settlement agency will help you come up with an alternative payment plan. Once you have enough money, you’ll provide a lump sum of cash to your debt settlement company, who will pay your creditors and settle your debt. The rest of your debt will be forgiven, and you won’t owe the full amount anymore.
Consumer Proposal
A consumer proposal is a legal process that allows you to negotiate with your creditors to pay back a portion of your debt, extend the time you have to pay off the debts, or both. You’ll work with a Licensed Insolvency Trustee (LIT) to come up with a proposal to your creditors.
Once the proposal is filed, you’ll receive immediate legal protection from your creditors, collection agencies, and wage garnishment. If your creditors agree to the proposal, you’ll stop paying them, and instead make monthly payments to your LIT, who will distribute the money to your creditors.
A consumer proposal is a good option if you’re struggling with your debt and want to avoid bankruptcy, but it will significantly impact your credit score.
Bankruptcy
Bankruptcy is a legal process that provides you with financial relief if you’re unable to repay your debts. Like a consumer proposal, bankruptcy requires the help of an LIT, who manages the process.
Once filed, bankruptcy provides immediate protection from creditors, collection actions, and legal action. Some of your assets may be sold off to pay your creditors, though certain assets may be exempt. At the end of the bankruptcy, most of your unsecured debts will be discharged, which means you won’t be legally required to pay them anymore.
Bankruptcy has a significant negative effect on your credit score and will stay on your credit report for years. That said, it can offer you a fresh financial start if you’re drowning in debt.
