Almost everyone today has at least one credit card on hand, access to a line of credit, or the ability to secure a payday loan. When used sparsely, debt is convenient, useful, and enables you to make purchases when cash is scarce. However, using debt habitually can quickly cause your debt level to spiral out of control, and before you know it, you can find yourself unable to make your loan payments. In the most extreme cases, the road ends with bankruptcy and a ruined credit rating that can last years.
Financial institutions, both commercial and nonprofit, have created solutions to relieve individuals’ stress grappling with debt issues. Debt relief programs are designed to help those heavily in debt to reduce their interest rates, negotiate better loan terms, and make timely payments. The two most common ways to improve your debt situation are through debt consolidation and debt management.
A debt consolidation loan is a type of loan that is created from merging multiple loans into a single debt. The process involves taking out one large loan and using the funds to pay off existing loans, leaving only the newly created consolidated loan as a debt obligation. A debt consolidation loan can help you manage your debt payments more easily than if you had to contend with multiple outstanding loans.
In general, debt consolidation loans are created to settle unsecured loans, such as credit cards and payday loans. In some cases, back taxes and student loans are included in the mix. Loans secured with collateral, such as mortgages and car loans, are almost always excluded from debt consolidation loans.
The most common way to consolidate your debt is to obtain a fixed-rate consolidation loan, where you’re assigned a set interest rate and fixed payment schedule. Ideally, the interest rate on the consolidated loan should be lower than your existing loans’ average rate, and you should be comfortable with the payment schedule.
Because a debt consolidation loan is designed to help you pay off your debt faster and with greater ease, your credit score is usually positively impacted. Your credit score may dip slightly at the inception of the loan but recover as you progress through your payment plan.
If you aren’t thrilled with the idea of taking on a large fixed-rate personal loan or have been denied one, you have other options at your disposal for consolidating your debt:
A debt consolidation loan offers both advantages and disadvantages you should carefully examine.
A debt management program functions similarly to a debt consolidation loan in that it combines your existing unsecured debt into one monthly payment at a lower interest rate. Unlike a debt consolidation loan, a debt management program doesn’t require you to take out a new loan – it’s an arrangement where your existing loans are blended into one repayment plan with a single payment. Debt management programs are structured by credit counselling organizations that operate as nonprofit entities; their goal is to help individuals struggling financially due to excessive personal debt.
You enroll in a debt management program by reaching out to a credit counselling service. Once accepted, you’ll receive a free evaluation of your debt situation as well as a plan on how to tackle it. The agency will work with your creditors to reduce your interest charge and create a customized payment plan that you can manage. In addition to providing you with the predictability and stability of a single payment plan, you’ll also have the support and guidance of a credit expert to help you along the way.
A debt management program can positively affect your credit score once you begin to make consistent payments. However, it may be impacted briefly in a negative way as you are typically required to cancel your existing credit cards.
Ensure you take the time to familiarize yourself with the advantages and disadvantages of debt management before you decide if it’s the right option for you.
Disadvantages
| Debt Consolidation Loan | Debt Management Plan | |
| Debt Amount | $1000 – $50,000 | $5,000 + (no limit) |
| Interest rate | 8% – 28% | 0 – 10% |
| Time to payoff | 24-60 months | 36 – 60 months |
| Credit score required | Usually, 650 or higher | No minimum credit score required |
| Debts you can include | Unsecured debt, sometimes back taxes and student loans | Unsecured debt, mostly credit cards |
| Credit card restrictions | None | Your credit cards will be closed, though you may have one for emergency use |
| Credit score impact | Neutral or positive but can cause a temporary dip. | Neutral or positive but can cause a temporary dip. |
A debt consolidation loan is an ideal option if:
A debt management program is an ideal option if:
Debt Relief FAQs
Can I get rejected for a debt management program?
Yes. You can be rejected if your creditors disagree with your proposed debt repayment plan – they may feel that you won’t pay them enough. Creditors will scrutinize your income and expenses to assess your overall ability to make debt payments to them. Do I need to provide collateral for a debt consolidation loan?
You may need to provide collateral for large loans deemed to be risky. Lenders will consider your income, the amount of debt you’re seeking, your credit score, and other factors. If you lack sufficient assets, you may have to find a person to co-sign the loan agreement.Where can I get a debt consolidation loan?
Major banks and credit unions all offer debt consolidation loans. Alternative lenders (including peer-to-peer networks) are also sources for debt consolidation solutions if traditional institutions are not feasible for you.
Debt consolidation and debt management are both excellent avenues to explore to get your debt under control. Both solutions have their pros and cons, so it’s imperative to do your research to determine which one is most suitable for you.
If your total debt load is not excessive, you’re not tied to high-interest rates, and you have decent credit, a debt consolidation loan may be the best option for you. Conversely, if your debt load is massive, mostly comprised of high-interest credit cards, and your overall financial situation is dire, a debt management program is likely the superior choice.
If you’re currently struggling to manage your debt, Loans Canada can help by matching you with the right debt relied service based on your unique needs.
A balance transfer is a process of transferring current debt owed to one lender to another lender. Balance transfers are most commonly used in relation to credit card debt. The motivation to complete a balance transfer is to get a lower interest rate on outstanding debt. When an individual is bankrupt, they are unable to pay their debts to creditors. Declaring bankruptcy is a legal process that involves handing over the bankrupt individual’s finances to a trustee. A legal, federal act that protects the rights of Canadian individuals who declare bankruptcy. The act also defines the process to follow when bankruptcy occurs. More specifically, the roles that creditors, trustees, and individuals take on during a bankruptcy proceeding in addition to specific conditions in which bankruptcy can be granted. A third party hired by a creditor to collect outstanding debts from a borrower. A collection agency is usually hired after the creditor has made various attempts to collect the debt from the borrower on their own without success. Collection agencies tend to be more aggressive with their actions to collect debts. If a creditor has been trying to collect a borrower’s debt without success, they may sell the debt to a collection agency. When this happens, the borrower’s account is classified as “in collections”. Any type of debt can go into collections including library fees, medical fees and credit card debt. Accounts in collections can negatively impact your credit score and report in the long term. A formal offer proposed by the borrower to the creditor to resolve owed debts. Consumer proposals may request that the borrower pay a portion of the owed balance that is considered to be a full payment or extending the due date of the debt. These tactics can be used exclusively or in conjunction along with other negotiation methods. The creditor can either accept or deny the proposal. Someone who is trained to provide guidance on personal, social or psychological issues. In relation to finances, counsellors help people learn how to manage their finances appropriately and make informed financial decisions. A professional advisory service that helps individuals create a plan to repay their debt and improve their credit. Credit counselling agencies are typically not-for-profit in Canada, sometimes even a public service. For-profit credit counselling agencies exist in Canada as well. The level of risk associated with a borrower defaulting on debt repayment. If the risk of the borrower defaulting is high, then credit risk is high, and vice versa. Amount of money an individual has borrowed (from lenders and credit card companies) and is in the process of repaying. The process of rolling over multiple debts into one, single loan or repayment plan. The reason why individuals consolidate debt is to get a lower overall interest rate and to focus on one monthly payment as opposed to many. A type of debt consolidation program that utilizes the services of a credit counselling agency to ensure an ideal repayment plan. Usually, a debt management program will help you achieve a lower monthly payment and more timely payments to lenders. The process of paying an agency to negotiate your debts with creditors. The goal is to reduce the total amount you owe that will be seen as full payment. Debt settlement can help you reduce the amount you owe, but it can also hurt your credit score because creditors often don’t want to negotiate unless there have been many missed payments or collection records indicate that you can’t repay your debt. Failing to make payments toward your debt for a lengthy period of time. Lenders have their own individual ways of classifying default, it may be as little as 60 days or as long as a year. Defaulting on debt can impact your credit negatively, especially if the defaulted account is sent to collections. The act of pushing something off to a later time. In terms of finances, this means paying a debt later than when it’s due or creating an arrangement where the customer receives the product or service now but pays later. The act of releasing a bankrupt individual from all or most of his or her debts. Sometimes not all debt is included in a bankruptcy, these debts would not be forgiven as a result of a discharge. For example, alimony, child support, and certain student loans cannot be discharged. Someone who is employed to provide financial services or guidance on financial issues to their clients. Intentional actions that are wrongful or criminal in nature that result in financial or personal gain for the individual who performed the actions. If you owe debts that you are not repaying, your lender can request a court order that has the power to remove funds directly from your bank account to pay off the owed debt. The name of this court order is a garnishment. There are restrictions as to how much can be garnished from your wages. A set, specific period of time after a due date when a payment can be made without consequences. In the event that a borrower defaults, a guarantor is a person who agrees to repay the debt on the borrower’s behalf. The fraudulent act of obtaining another person’s private identification information and using it for financial or personal gain. An individual who is licensed by the Superintendent of Bankruptcy in Canada and is authorized to administer consumer proposals, bankruptcies and manage assets held in a trust. Their profession involves helping and educating people who struggle with debt problems. A legal claim on the property of an individual to ensure that debt will be repaid. For example, a lien is placed on a vehicle that is being financed and will only be removed once the loan has been paid off in full. Debt that must be repaid over a period of twelve months or longer. A large, singular payment made at a specific point in time as opposed to numerous small payments spread out over various points in time. The lowest amount of money you are required to pay towards a credit card or other debt by a specific date to avoid a particular penalty. A negative bank account balance caused by withdrawing more money than what is in the account. The period of time over which a borrower is obligated to make a payment. Payment periods could be weekly, bi-weekly or monthly, sometimes even longer. If you owe money for a loan that has collateral and you default on the loan, the creditor can claim the collateral through the process of repossession. The repossessed collateral is sold and used to cover the owed amount of the loan. Assets that are commonly repossessed are cars, houses, equipment, and boats. A legal right held by banks to seize deposited funds from a chequing or savings account to repay an owed amount that is in default. Debt that must be repaid in under twelve months. A debt repayment strategy designed to motivate individuals to tackle repaying multiple debts. The strategy involves repaying the lowest debt amount first, then the next lowest debt amount, then working up to pay the highest amounts one by one. The idea is that individuals will be motivated to continue paying down their debt because there are many successes in the early stages of this plan. The drawback of the repayment strategy is that it is not the most cost-effective strategy. A law that dictates the maximum amount of time all parties in relation to a particular case have to take legal action. After that period of time passes, legal action cannot be taken, unless under special circumstances. Each crime, whether civil or criminal, has a different set statute of limitations. Debt Relief Glossary
Terms
Balance Transfer Bankruptcy Bankruptcy and Insolvency Act (BIA) Collection Agency Collections Consumer Proposal Counsellor Credit Counselling Credit Risk Debt Debt Consolidation Debt Management Program Debt Settlement Default Deferment Discharged Bankruptcy Financial Advisor Fraud Garnishment/Garnish Grace Period Guarantor Identity Theft Licensed Insolvency Trustee (LIT) Lien Long-Term Debt Lump-Sum Payment Minimum Payment Overdraft Payment Period Repossession Right Of Offset Short-Term Debt Snowball Repayment Method Statute of Limitations
Mark is a writer who specializes in writing content for companies in the financial services industry. He has written articles about personal finance, mortgages, and real estate and is passionate about educating people on how to make smart financial decisions. Mark graduated from the Northern Alberta Institute of Technology with a degree in finance and has more than ten years' experience as an accountant. Outside of writing, he enjoys playing poker, going to the gym, composing music, and learning about digital marketing.
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