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How Debt Consolidation Works

Debt Consolidation Afarber PartnersDealing with and handling debt can be difficult, stressful and very tough to cope with. Many people become overwhelmed when they think about their debt and struggle to figure out how they’re going to pay it back.

One option that is available is called debt consolidation. In this process, a person gets what is called a debt consolidation loan and then uses this loan to pay off their existing debts. This leaves the person with a single loan to pay back, rather than a variety of different loans from different lenders with different interest rates.

A debt consolidation loan can help you pay down your debt if the interest rate on the loan is lower than the overall interest rate of your existing loans. This means that you will pay less money each month due to a lower interest rate. This process can make it easier for you to fit your debt repayments into your budget.

However, what a debt consolidation loan does not do is reduce the overall amount that you owe. While it does reduce the interest, the total amount owing stays the same. The only difference is that it is consolidated into a single loan.

Another potential issue with a debt consolidation loan is that it can be difficult to get a loan with a lower interest rate. This is especially true if you have a history of missing payments or paying your bills late. Lenders will not be as willing to offer you a loan with a favourable interest rate if you have a poor payment history or a bad credit rating. Unfortunately, if you are having debt issues and/or a high amount of debt, you may have trouble getting a debt consolidation loan that works for you.

 

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Alternatives to a Debt Consolidation Loan

There are several reasons why you may choose to go a different route other than a debt consolidation loan. These reasons include:

  • Being unable to get a loan with a favourable interest rate
  • The fact that a debt consolidation loan does not reduce the total amount owing
  • Not being able to make monthly debt payments in the amount owing

If any of these situations sound like you, you may wish to consider other options for eliminating your debt.

A consumer proposal is an option that many people choose. In a consumer proposal, you meet with a trustee in bankruptcy reviews your financial situation. Only a trustee in bankruptcy can assist you in filing a consumer proposal. Once the trustee reviews your situation, he or she will determine what a fair offer to your unsecured creditors is. This offer will be less than the total amount that you owe, but more than your creditors would get in a bankruptcy.

Only unsecured debts can be included in a consumer proposal. This includes debts such as credit card debt, unsecured lines of credit, overdrafts on bank accounts, personal loans, department store credit cards and other such debts. It does not include secured debts such as mortgages or leased or financed vehicles, for example.

If your proposal is accepted by the majority of your unsecured creditors, then all of them are bound by its terms. In addition, any legal action that your creditors have started against you, as well as any wage garnishments, will stop.

Your proposal is paid in monthly payments for a predetermined amount of time. These lower monthly payments will be easier to fit into your budget than your current debt payments or the payments on a debt consolidation loan. In addition, interest is frozen when you successfully file a proposal, so there are no additional interest charges on your debt. Typically, a consumer proposal is paid off in between one and five years. In a consumer proposal there are no additional fees, as all fees for the services provided are included in the monthly payment to the creditors.

If you are struggling with debt and considering a consumer proposal, it is a good idea to speak with a trustee in bankruptcy. A trustee is licensed and regulated by the federal government and is able to provide information on the debt relief options available to people like you who are having financial difficulties.

Speaking with a Licensed Insolvency Trustee can be the first step towards eliminating your debt and putting you on the path to rebuilding your financial life.