When it comes to getting a handle on their debts, one of the first techniques that a lot of individuals look into is the possibility of getting a loan to consolidate their debts. The credit counselling program, also known as a Debt Management Plan (DMP), is an additional option for those who are looking to consolidate their debt.
Even though the end goal of both strategies is to consolidate your debts into one manageable payment, it is essential to keep in mind that these two options represent two separate solutions that may or may not be equally appropriate for your particular set of financial circumstances.
What is Debt Consolidation?
The process of combining several separate financial obligations into a single, more manageable one is known as debt consolidation. This new obligation can come in the form of a loan or a settlement, depending on the individual circumstances.
Working with a bank or some other type of financial organisation is often required in order to secure a conventional debt consolidation loan. Because these financial establishments are giving you a loan, they will normally need some type of security in the form of an asset, and a good credit score is typically required as a qualification condition for working with them.
Read also: How To Get A Debt Consolidation Loan With Fair Credit In Singapore
What is Credit Counselling?
Credit counselling seeks to consolidate your debts inside a settlement program rather than combine them into a new loan. A credit counsellor will oversee the formation of a thorough repayment plan for you to clear all of your obligations completely, and this plan will be supervised by the consolidation of your debts.
These programs may, in some instances, involve interest rate reductions that have been negotiated with the financial institutions that provide funding for the credit counselling service.
Credit counsellors are the ones who deliver credit counselling services to clients; these professionals may work for private companies or may be affiliated with nonprofit organisations to deliver their services. It is essential to be aware that credit counsellors of any kind, including those linked with groups that operate only on donations, charge money for their services.
What Debts Can I Consolidate?
Common types of consumer debt, such as credit card balances, payday loan balances, and overdrafts, can be addressed through the use of credit counselling and bank consolidation loans, both of which are feasible solutions.
When it comes to dealing with debts that are tied to the government, a consumer proposal, which is a particular mechanism for the settlement of debt, is the only option for consolidation that can be considered. This one-of-a-kind technology not only consolidates and forgives consumer debt, but it also has the capability to manage government debts such as tax bills and student loans, making it possible to provide a solution that is more all-encompassing.
How Much Does it Cost?
While both consolidation loans and credit counselling programs entail the responsibility of repaying your entire debt, the fundamental distinction between the two lies in the interest and fees associated with each option.
Debt Consolidation Loan
Securing a debt consolidation loan with a reasonable interest rate, if eligible, may result in lower overall costs for repaying your accumulated debts compared to continuing individual debt payments. Typically, there are no application fees for consolidation loans.
For instance, if you had a total debt of $10,000, which you planned to repay in full over 3 years at an 18% annual interest rate, you would be paying approximately $360 per month for 3 years. On the other hand, using a debt consolidation loan to clear your debt over the same period at a 12% annual interest rate would result in monthly payments of approximately $330 for 3 years.
Credit Counselling
Most credit counsellors have the ability to negotiate agreements with your creditors to halt future interest charges. Typically, this means you will eventually repay the entirety of your debt, along with the fees and other charges imposed by the credit counsellor.
For example, if you opted for a credit counselling program to settle your $10,000 debt without incurring any interest charges, you would make monthly payments of around $277 for 3 years, in addition to the credit counsellor’s fees.
It’s important to note that if any of your creditors decline to participate in the proposed plan by your credit counsellor, you will still be responsible for paying those debts separately, in addition to the settlement payments to your credit counsellor. Furthermore, when dealing with government debts, such as those owed to the Canada Revenue Agency for income taxes, student loans, GST, etc., a credit counselling plan is not an applicable solution.
How your Credit History is Impacted
Debt Consolidation Loan: Getting a debt consolidation loan as a strategy to gain control over your debt can potentially lead to an improvement in your credit score, provided you consistently make timely payments. However, the significant challenge lies in the fact that unless your credit rating is considered “excellent,” you may encounter difficulties in qualifying for a consolidation loan.
Credit Counseling: Enrolling in a credit counselling program will leave a mark on your credit history for a period of 2-3 years following the completion of your settlement or for 6 years from the date of your account default, whichever occurs first. Remarkably, this impact is comparable to the effect of a consumer proposal consolidation, despite the requirement to repay your entire debt within a credit counselling plan.
It’s crucial to recognise that failing to settle your debts in full according to the agreed-upon terms will inevitably have a negative impact on your credit history. However, it’s important to bear in mind that sometimes, enduring a relatively short-term setback can ultimately yield positive long-term results.
Other Options to Consider
Because neither bank consolidation loans nor credit counseling settlements have the capacity to reduce the actual amount of debt you are obligated to repay or legally bind your creditors, these options may not align with your specific needs. Other important factors to consider include:
- Do you have the financial means to repay your entire debt, totaling 100%, within a timeframe of 2-5 years?
- Are your creditors threatening legal action against you?
- Are you confronted with government-related debts, such as taxes or student loans?
- Are you comfortable with the idea of collaborating with a lender or an agency that predominantly receives its funding from lenders?
Consumer Proposals can serve as a viable alternative to the conventional methods of debt consolidation loans and credit counseling programs. A Consumer Proposal offers several advantages:
- The ability to consolidate nearly all types of debt, including government-related debts.
- A reduction in the actual amount of debt you are obligated to repay.
- The cessation of all future interest charges.
- The establishment of a legally binding agreement with your creditors.
