How to Decide On the Best Debt Consolidation Service?
If you are struggling with debt, you may be considering debt consolidation to get your finances back on track. This is a wise decision, but choosing the right debt consolidation services in Ontario is essential. Many options are available, and not all of them will solve your debt problem equally. Without the proper knowledge, it will be challenging to choose the best service for your needs.
All You Need to Know About Debt Consolidation
Debt consolidation is taking a single new loan to pay off multiple outstanding debts. This can provide several benefits, including lower interest rates, one monthly payment, and simplified debt management. However, it's important to carefully compare all available options before choosing a consolidation plan.
Consolidating debt also comes with some potential risks. For example, if you don't carefully read the terms of your new loan agreement, you could end up paying more in interest over a long time. Additionally, missed or late payments on a consolidated debt can cause your credit score to suffer. So, before you make the decision to consolidate your debts, be sure to weigh the pros and cons carefully.
There are four standard debt consolidation services in Canada. You can choose from these options that best suit your unique case:
- Debt Consolidation loan
- Debt settlement programs
- Repayment with a debt management plan
- Consumer proposal
As a licensed insolvency trustee, we believe that a consumer proposal is the safest option you can choose for many instances. However, it's still wise to explore all your options. Learn how each consolidation debt service in Ontario works and the benefits as well as the risks you may encounter.
Table Of Contents
Consolidating By Seeking a Debt Consolidation Loan
When you consolidate debt with a Debt Consolidation Loan, you're essentially taking out one big loan to pay all your existing smaller loans. For instance, you have two to three credit cards that you struggle to pay. You can apply for a consolidation loan to pay all the credit cards. Then you only have to worry about one payment every month. This strategy can be a helpful way to handle your debt and make your monthly payments more manageable.
A debt Consolidation Loan is a type of personal loan that can be used to pay off several high-interest debts. The interest rate on a debt consolidation loan is typically lower than the interest rates on individual debts so that it can save you money in the long term.
Specific criteria should be met to take advantage of this option:
- Copy of monthly payment that will determine your payment capacity
- Source of income should be sufficient to pay the consolidated debt
- Co-sign or collateral (car, house, or other properties)
- Individual is currently paying interest and can meet consolidated payments requirements
Benefits Of Refinancing Through Debt Consolidation
- You can get a lower interest rate. When you consolidate your debts into one loan, you'll be able to take advantage of a lower interest rate. This can save you money in the long run and help you pay off your debt more quickly.
- You can simplify your payments. By paying a single monthly payment, it's easier to keep track of your debt and stay on top of your finances. This leads to avoiding late payments and penalties.
- You can reduce your monthly payments. If you're struggling to make ends meet, consolidating your debts into one loan can help reduce your monthly payments.
Possible Risks Associated With Debt Consolidation Loan
When considering a debt consolidation loan, it is important to weigh these risks against the benefits of the loan. If you are confident that you can make the loan payments and get a reasonable interest rate, a debt consolidation loan can be a great way to get out of debt. However, if you are not confident in your ability to make the payments or get a low-interest rate, you may want to consider another option.
- The risk of default: If you fail to make payments on your debt consolidation loan, you could default on the loan. You might damage your credit score, leading to legal action against you.
- The risk of high-interest rates: If you consolidate your debt and end up seeking a loan with a high-interest rate, you could pay more in interest than you would have if you had not consolidated your debt.
- The risk of extending the loan term: Since the amount of debt remains the same, If a person is unable to make payments and extends the loan duration, they may end up paying more in interest by the end of the loan.
- The risk of losing your assets: If you do not have enough assets to cover the amount of your loan, you could lose your possessions if the lender takes legal action against you.
Interest-Free Debt Management Plans
A debt management plan is a credit counseling service offered by credit counseling agencies. A DMP helps consumers repay their debts by consolidating all of their credit cards and other unsecured debts into one monthly payment that is more manageable for the consumer. The credit counselor's role is to negotiate an interest rate deduction or an interest-free period for your loan.
How does a debt management plan work?
A debt management plan, or DMP, is a formal agreement between you and your creditors to pay your debts over an extended period. Credit counseling organizations help consumers manage their debt in two ways. First, they provide information on how to budget and live within one's means so that debts can be repaid over time. Second, they can negotiate with creditors on behalf of the consumer to reduce or waive interest rates and late fees and reduce the total debt owed. Generally speaking, participation in a DMP allows consumers to repay their debts in 3-5 years without negatively impacting their credit score.
Debt Management Plan VS Consolidate Debts
- You have the option to choose which debts you can include or exclude in the plan
- A Debt Management Plan can help you get out of debt faster than if you tried to do it on your own
- Single monthly payment to the credit counselor instead of many
Disadvantages:
- Not all types of debts can be included
- You should complete payment in three years
- Your credit score can take a hit.
Risks To Consider Before Approaching Credit Counselling Agency
- You may pay more in fees than you would if you negotiated directly with your creditors.
- Not all credit counseling agencies are certified and reputable and may not be able to provide the best advice or assistance when it comes to consolidating debts
Debt Settlement or Debt Consolidation?
Debt settlement is negotiating with your creditors to reduce the amount you owe. Typically, this involves hiring a debt settlement company that will contact your creditors on your behalf and work out a payment plan that's more affordable for you. They help you negotiate a lower repayment amount with your creditors, but they typically charge a fee for their services, which can be pretty expensive.
Debt settlement companies will often ask you to stop making payments to your creditors and instead send all of your payments to the debt settlement company. The debt settlement company will then use those funds to negotiate a repayment amount with your creditors. If they are successful, they will keep a percentage of the repayment amount as their fee. If they are not successful, you still owe whatever amount of debt you agreed to pay. Debt settlement is not right for everyone, so it's essential to speak with a qualified credit counselor or a licensed insolvency trustee before making any decisions.
Offering a Consumer Proposal For Debt Consolidation
A consumer proposal is a sensible way to get out of debt and avoid bankruptcy. A consumer proposal is a legal process that allows you to negotiate with your creditors to repay your debt, or a portion of it, over a more extended period. You can also arrange to lower your interest rates and reduce monthly payments.
An insolvency professional is appointed to act as your trustee when filing a consumer proposal. The trustee will work with you and your creditors to develop a repayment plan that everyone can agree on. Once the court approves the plan, it becomes legally binding on all parties involved.
A consumer proposal can be an attractive option for anyone who is struggling to repay their debts. It's less expensive and less risky than declaring bankruptcy, and it can provide you with much-needed relief from harassing phone calls and letters from creditors.
There are many options to choose from when it comes to consolidating debts. However, each requires extensive understanding to balance the risks and advantages.
Contact us! If you can't afford to pay your debts or are not qualified for a debt consolidation loan, let our team at Risman Zysman Inc. help you with the best debt relief solution. We'll work with you to create a proposal that works for your budget and your creditors. And we'll help you through the entire process.