Do you have a lot of debt? Are your monthly payments too high? If your debt is getting out of hand and you feel like you can’t control it anymore, enrolling in a debt consolidation program could be the solution you’ve been looking for.
But we also completely agree that the unknown is scary. Having some basic knowledge about the inner workings of a debt consolidation program will allow you to take full advantage of it and hopefully achieve all your goals. This is why we want you to know what to expect when enrolled in a debt consolidation program before you make your final decision.
Don’t know if you have a debt problem? check out when is the right time to speak to a professional.
A debt consolidation program or debt management plan(DMP) is an informal proposal that is administered by a credit counsellor. The goal of a debt consolidation program is to consolidate your debt and reduce your payments into one affordable monthly payment. However, it is important to remember that, the goal of a debt consolidation program is not to eliminate debt. It simply reforms it so that it is more affordable. In some cases, however, it may eliminate some of the debt you owe or pause any accruing of interest.
A debt consolidation program, also known as a Debt Management Program (DMP), should not be confused with a debt consolidation loan. While a DMP is an informal proposal that is administered through a credit counsellor, a debt consolidation loan is simply a loan that you apply for with a lender to consolidate your debts.
Here are some of the key differences between a debt consolidation program and a debt consolidation loan.
| Debt Consolidation Program | Debt Consolidation Loan | |
| Process | Your credit counsellor will negotiate a debt consolidation plan with your creditors. | You must apply for a loan with a lender. |
| Legality | While your creditors are not legally bound to the contract, they agree to the proposal set by your credit counsellor. | You’ll be bound to your new loan. Any missed payments will affect your credit. |
| Interest | Depending on how your credit counsellor negotiated, you may or may not have to pay any extra interest on your balance. | Your lender will set an interest rate that you must pay to pay off the loan. |
| Eligibility Requirements | You do not require anything to enter a debt consolidation program. However, you must be able to afford the debt consolidation payments. | To qualify for a debt consolidation loan, your lender will have certain requirements regarding your credit score, income and debt level. |
Unlike more drastic forms of debt relief like a consumer proposal or bankruptcy, a debt consolidation program is not a legal process. Instead of working with a lawyer or a Licensed Insolvency Trustee, you’ll work with a certified credit counsellor who will help you through the entire process.
The purpose of a debt consolidation program is to consolidate your eligible debts into a more manageable monthly payment. Generally, when entering a debt consolidation program you can expect:
Your main goal when meeting with your credit counsellor is to provide them with as much information about your finances as possible, the more information they have, the better they’ll be able to help you. Your credit counsellor will require information regarding your income, expenses and debts. So be sure to bring along your bank statements and other financial records. With it, your counsellor will:
The credit counsellor who you work with will negotiate, on your behalf, with your creditors and lenders in hopes of:
This way you can continue to afford all the necessities of your life while working toward your goal of being debt-free.
If your creditors agree to your credit counsellor’s proposal, you’ll begin making payments. These payments are paid to your credit counsellor who will then distribute the payment to your creditors. Once you’ve completed the program, you’ll be debt-free, however, your credit will be negatively impacted for 2 years after you’re done the program.
A debt consolidation program is a great option for many consumers who struggle to keep up with the cost of being in debt. With that being said, not all types of debt can be included.
Generally speaking, only unsecured debts can be consolidated such as credit card debt, personal loans, and unsecured lines of credit. However, in some cases, you may be able to add your secured debt.
A debt consolidation program is a great option for those who can’t afford to keep up with their monthly payments. It will allow you to work toward paying off your debts and regaining some control over your financial life. Let’s look at some of the benefits of joining a debt consolidation program.
Depending on your financial situation and how much debt you have, you could see a reduction in your monthly payments by as much as 50%. However, do remember that doesn’t mean they’ve eliminated the debt you owe but rather had it reduced by extending your payment term. Similarly, your credit counsellor may have been able to cut or reduce the interest you owe, meaning more of your money will be going toward paying off the principal rather than the interest that is accumulating.
Click here to see which mistakes to avoid when paying off your debt.
Another advantage of a debt consolidation program is that you’ll only have to worry about making one monthly payment. You’ll make your payment to the credit counsellor who you’re working with and they will distribute the money to your creditors accordingly.
Once you enroll in a debt consolidation program your credit counsellor takes control of your debt and negotiates with your creditors on your behalf. Your counsellor might be able to get certain penalties removed, fees reduced or charges waived. Certain fees may have to be paid no matter what, but it never hurts to have a professional working to help you get the best deal possible.
Because your counsellor works hard to consolidate your debts and get reductions on fees and interest for you, it allows more of your money to go toward paying off the principal of your debt instead of the interest that your debt accumulates. This in turn will allow you to pay off your debt quicker and at a lower cost.
One of the best parts of a debt consolidation program is that you’ll be avoiding a more serious financial issue, like bankruptcy. Bankruptcy is often the best choice for certain people but if it can be avoided, it should be. With a debt consolidation program, you’re still paying off your unsecured debts in full which means your credit history won’t have the big black mark of bankruptcy on it.
As with anything in life, everything has its advantages and disadvantages. A debt consolidation program is no exception. This is why it is important to understand what debt consolidation is and if it is the right choice for your situation. Here we’ll go over the disadvantages so you can make an informed decision.
Depending on the credit counselling agency you work with, the fees for their services will vary. To ensure a debt consolidation program is worth your while, be sure to calculate how much it costs versus how much you’d save in interest from consolidating. In general, you can expect your credit counsellor to charge you the following fees:
If you’re unable to afford their service, you can ask if they can reduce the fees. Some credit counselling agencies adjust the fees according to your financial circumstances.
When it comes to your debt you are your own expert. If you feel like you need help then you probably do. If you think asking for help is your best option, ask for it.
If you’re losing sleep because of your credit card bills, if you’re having trouble concentrating at work because of a predatory payday lender or if you feel like your life is on hold because your personal debt levels just keep getting bigger, we want you to know that you’re not alone and there is help waiting for you.
Find out if you have too much credit card debt.
Help is available to all Canadians who are currently dealing with debt and we want you to take advantage of that help so you can start living the debt free life you deserve. Give yourself the best possible chance for a brighter financial future by doing some research and finding a debt consolidation program that’s the right fit for you.
The sooner you enroll in a debt consolidation program the sooner your new debt-free life can start. Taking that first step and asking for help can be scary but we know that once you start you’ll be so happy you did. Becoming debt-free is a journey, one that will take a lot of hard work and effort from you. If you stick to the program that your credit counsellor creates for you, we know you’ll be able to achieve all your goals. The most important thing for you to do is learn from this experience, listen to your counsellor and work hard to get rid of bad financial habits and create new good ones.
Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.
Loans Canada is pleased to announce it placed No. 131 on the 2022 Report on Business ranking of Canada’s Top Growing Companies.
All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.
When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.
Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.
