—
If you have a lot of unsecured debt such as student loans or credit cards, debt repayment can take up a significant chunk of your monthly budget. In Canada, debt repayments occupy such a large chunk of the average person’s monthly income, that over half of Canadians have less than $200 to spare after all of their expenses. That can quickly be eaten up as rising interest rates could cost up to another $120 per month between credit cards, student loans, lines of credit, and mortgage or car payments.
High interest payments can make repaying your debt a frustrating process. Every month, you send hundreds of dollars to pay off your student loan, and it hardly makes a dent in the interest, leaving your principal where it is to generate yet more interest. The same can happen with credit card debt or any type of unsecured debt, i.e., loans that don’t have any collateral or physical assets attached.
One financial product that can seem attractive to people with high debt repayments is a debt consolidation loan, essentially paying off one debt by taking out another loan. Starting over from scratch can be a tempting solution, but will a debt consolidation loan save you money?
There are two ways to find out whether a debt consolidation loan works for you: math and your own behavior.
First, look at the math or visit a bankruptcy trustee, now known as a Licensed Insolvency Trustee, to help you figure it out. Look at the interest rates on all your credit card or student loan debts. Are any of them lower than what you would get from a debt consolidation loan? If so, it doesn’t make sense to include them in a debt consolidation loan. You should also look at how big the monthly payments are. If the debt consolidation loan requires bigger payments, maybe the solution is increasing the amount you put toward credit card and student debt repayments. Reducing the principal is the only way to reduce the amount of interest that accumulates.
A visit to a bankruptcy trustee like David Sklar & Associates can help you figure out whether a debt consolidation loan makes sense mathematically.
The second factor to consider is behavior. Using a debt consolidation loan to pay off your credit cards means you get to return those balances at zero. Are you prepared to cancel your credit cards? The sudden freedom to use your credit cards again can be too tempting for some, but since you have effectively transferred that debt to a different loan, you could wind up doubling your debt load by maxing out your credit cards again.
Before you get a debt consolidation loan, talk to bankruptcy trustees like David Sklar & Associates and find out all your options. Credit counselling with a bankruptcy trustee may help you get out of debt, while you may also be eligible for debt relief through a consumer proposal. Debt consolidation loans are a financial product like any other. Do the math to find out whether it makes sense.
—
—
This post made possible by site supporter Mike John.