lightningOver the last few years during the financial crisis people have lost their jobs, homes, and in some cases their families.

When our backs are up against the wall, it is in human nature to look for a quick fix…a band aid solution that helps temporarily but does not heal long term. A quick solution to a personal financial crisis is to use credit in the shore term, in the hopes of finding a job in the long term and being able to repay the debts.  But, what happens when your income does not support the debt repayment?

There are usually two options (other than filing for bankruptcy) for people who are drowning in debt; a consolidation loan through a financial institution, or a consumer proposal through a credit consolidation company.

A consolidation loan is a personal loan that is authorized by your financial institution to consolidate all of your various debts into one easy payment. This is the best option for your personal score and the most hassle free choice of the three options.  However, many financial institutions have stopped offering credit consolidation loans to clients due to the high default rate.  The interest rate on a credit consolidation loan is generally higher than other types of personal loans but it is lower than the usual 19% on a credit card.

Credit consolidation loans are also very difficult to get approved. If a client is already drowning in debt, the odds of another financial institution granting more credit are very slim. I always tell my clients when they are pre approved for credit to always take it, even if they don’t need it at that time. Because when they do need it, their situation may be less desirable, and therefore the loan will not be approved. As long as the payments on a credit consolidation loan are made on time your credit score remains excellent.

There are no negative impacts on your credit score, and the only paperwork required are all of your credit card, loan, and line of credit statements.  All previous credit cards and loans/lines of credit will be closed.  Once the credit consolidation loan is paid off over a maximum of 5 years, clients can begin to rebuild their credit.

A consumer proposal is filed via a credit consolidation company. It is not a consolidation loan, as consumer proposal companies are not financial institutions.  A consumer proposal is handled by a third party who will negotiate with your creditors to lower the interest rate on your debts.  A lower interest rate means that the payments will go towards the principal debt and therefore the balance owing will be paid off faster.

Similar to a consolidation loan, all of your credit cards and loans will need to be closed.  However, unlike a consolidation loan, a consumer proposal has a negative effect on your credit bureau.  It is not the same as declaring bankruptcy but it has the same negative effect without the bad stigmatism that bankruptcy can have.

A credit consolidation company will pay off the debts on your behalf; and your monthly payments will be made directly to the credit consolidation company, along with their usual 15% fee.  The interest rates on your debts will be lowered but the fees for a credit consolidation can be costly.

A consumer credit proposal is less desirable than a consolidation loan because of the negative affects it has on your credit score.  However, if a credit consolidation loan is not available then a consumer credit proposal maybe the only option.

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IMPORTANT: Make sure to research exactly what you’re getting into before you sign any paperwork! There are some very good banks and institutions out there that can help you out and get you back on track, but there are even more really really BAD ones that will prey on you. So please do your research and understand what you’re getting into before jumping in :)

(Photo By ElGarza)

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Tahnya is a Certified Financial Planner and former Investment Advisor turned marketing and communications professional She holds a degree from Concordia University, is debt free and currently works in the field of digital marketing.


This entry was posted in Credit, Credit Cards, Debt by Kristina Tahnyak. Bookmark the permalink.

Avatar photo About Kristina Tahnyak

Tahnya is a Certified Financial Planner and former Investment Advisor turned marketing and communications professional She holds a degree from Concordia University, is debt free and currently works in the field of digital marketing.

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