Getting out of debt isn’t cheap. People can wind up owing large sums of money for all kinds of reasons. They may have gone through a period of unemployment or loss of income and relied on credit cards to make ends meet; they may have spent beyond their means and debt caught up with them, they could have gone through a separation or a medical issue – there is no judgement when you’re seeking out a debt solution.
When you’re looking for a way out of debt, it doesn’t matter how you got there. What matters is how you can get out of debt without taking years.
Average debt loads vary widely by age group, but in Canada, the average household owes over $58,000 in non-mortgage, non-auto debt. That includes credit cards, installment loans, and lines of credit (it should be noted that while some lines of credit are unsecured, others are backed by home equity).
On top of this, interest charges will bloat the total amount you have to pay back over the years. You always pay the interest first before your payments go toward the principal.
It would take most households years to pay all of that back, even if they resisted the pressures to climb even deeper into debt. A good debt solution should give you a mechanism for reducing the amount of money you have to pay.
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Debt Consolidation Loans
One of the most straightforward ways to save money on your debt is through a debt consolidation loan, where you take a new loan at a lower interest rate and pay back all of your high-interest debts right away.
It can seem like you’re just shuffling one debt out for another, but if you can reduce your interest rates, it’s an effective way to save.
Generally, debt consolidation loans are only effective for high-interest credit, such as credit cards or payday loans. One challenge you may find is qualifying for a better interest rate if you are already struggling to make payments on existing debts or bills.
Consumer Proposals
A consumer proposal is a debt solution that can reduce the total principal you have to repay and reduce the interest rate you pay to zero.
The process starts when you meet with a Licensed Insolvency Trustee. They go through your budget, and, based on your income and expenses, offer to pay creditors a percentage of your original debt. This is done through fixed monthly payments.
If it sounds too good to be true, keep in mind that consumer proposals are an alternative to bankruptcy. They will show up on your credit report, and they can make it very hard to qualify for future loans. However, they will disappear from your credit report three years after you complete your proposal and can give you a fresh start. You can wind up saving as much as 80% of the original amount you owe.
Debt Settlement
With a debt settlement, you offer your creditors a large lump sum of money all at once. In exchange, they forgive the remainder of your debt.
It’s a process that can work well if you come into a one-time windfall, but be wary of debt settlement companies that will charge you fees on your savings while advising you to stop paying your debts. A DIY repayment plan can sometimes be more cost-effective.
Before you seek out a debt solution, do your research into how well they apply to your financial situation, as well as the benefits and drawbacks that come with them.