consumer proposal,  credit cards

When does debt consolidation loan make sense?

What is the best company for consolidation loans?

$33.5k in debt and looking at debt consolidation. How do I find the best company for consolidation loans, or at least someone to talk to about it

I looked on Google of course, but you never really know what places are legit, and I couldn’t really find anything like testimonies on the best company for debt consolidation or anything like that. Is doing this online the best way? Or is looking locally better? I’ve just never had to do anything like this before, so I’m a little lost. Should I speak to a financial advisor at my bank about this maybe? Or somebody else that you might suggest?

Another question I have is, do I separate which debts I use a debt consolidation loan for, or do I leave them all under the same umbrella? For example, I have the high interest debts, but I also have a car loan that has 0 interest, so all the payments I make on it go straight to paying down the principle. Is it best that I just tough it out with those types of debts and pay them down myself? The only thing I’m concerned about is that just those payments themselves, even though interest free, are still high enough that I almost can’t afford them. But that’s also just in my current situation, with having to make multiple payments to all my other debts every month as well.

I’m pretty much dead set on debt consolidation as I have multiple debts that just accrue way too much interest and it’s becoming impossible for me to pay these debts down before the interest adds up.

Victor Fong, Licensed Insolvency Trustee replies:

Calculating the Weighted Average Interest Rate

Before you go loan shopping, calculate the weighted average interest rate (WAIR) that you’re paying on all your debts. Here’s an example – you have 3 credit cards as follows:

Name               Balance   Interest

Visa                   $10,000         12%

Mastercard      $15,000         18%

Amex                $20,000         30%

Total:             $45,000

WAIR = (10/45 x 12%) + (15/45 x 18%) + (20/45 x 30%) = 22%

In this example, it would only make financial sense for you to borrow a consolidation loan of $45,000 if you pay 22% per year or less.

If you can approach your bank and get a loan with a rate of interest that’s less than the WAIR then you’ll come out ahead financially.

If you cannot, then you should not resort to going to a high interest lender; although it’s much easier to get a consolidation loan approved by one of these places, they’ll charge you interest of up to 48% per annum. Taking out such a loan would financially ruin you.

Debt Management Plan

If you’re unable to get a consolidation loan at an interest rate that’s less than the WAIR of your debts, you should consider going on a Debt Management Plan with an accredit credit counselling agency. A DMP will allow you to pay off your debts interest free over up to five years through monthly payments. The downside is that it’ll negatively impact your credit score. A DMP will stay on your credit history for 2 years after you pay it off.


Consumer Proposal

If you cannot even afford the monthly payments under a DMP, then you might want to consider settling your debts with the assistance of a Licensed Insolvency Trustee through a consumer proposal. When you meet with an LIT for a consultation, he will determine how much you can afford to pay which would be acceptable to your creditors. If your creditors approve the settlement, it can be paid interest-free over up to five years. Like a DMP, a consumer proposal will negatively affect your credit score. A CP will stay on your credit history for 3 years after you pay it off or 6 years after the date of filing, whichever occurs first.

Victor is the President of Fong and Partners Inc. He is a Licensed Insolvency Trustee and Chartered Professional Accountant. With many years of experience in the insolvency field, Victor has been involved in both corporate and consumer insolvency engagements. Previously with a large national firm, Victor founded Fong and Partners Inc. so that he could dedicate his professional life to help people from all walks of life to deal with their debt.