Debt Consolidation Options in Calgary

As a resident of Calgary, Alberta, you have a series of debt consolidation options – including debt consolidation loans, credit card balance transfers, and home equity loans. These options aren’t practical for everyone, though – so it’s also worth understanding other debt solutions, such as debt management plans, debt settlement options, and consumer proposals.

In this guide, we’ll take a more detailed look at this range of debt consolidation options – including some pros and cons about each. We’ll also explain other debt solutions – with some advantages and disadvantages compared to debt consolidation.

Let’s start by looking over the most common debt consolidation services.

Debt Consolidation Loan

A debt consolidation loan is a financial product that lets you merge multiple debts into one loan with one monthly payment. You can use this loan to pay off credit cards, personal loans, lines of credit, overdrafts, or other sources of debt.

A significant advantage of borrowing money with a debt consolidation loan is that it often has a lower interest rate than your existing debts – so people typically stand to save money on their debts in the long run.

By consolidating your debts you may also simplify your finances significantly – making it easier to keep track of payments and less likely to miss them.

Although potentially appealing, qualifying for a debt consolidation loan can be tricky – especially if your credit score is low or you’re behind on payments. Some lenders may require collateral like home equity to secure the loan, which puts your assets at risk if you default.

It’s also important to be strict with your finances if you decide a consolidation loan is right for you. Without a disciplined approach to budgeting, you might find yourself accumulating new debt while paying off the consolidation loan and making your situation worse.

Talking to a credit counselling service before getting a consolidation loan can help you have a realistic plan to pay off your debt and avoid future financial problems.

Pros

• Simplifies debt management by combining multiple payments into one monthly loan payment
• Potentially lower interest rates compared to individual debts
• Can improve cash flow with a lower monthly payment
• May improve credit score if payments are made on time
• Provides a clear timeline for paying off debts

Cons

• Requires a satisfactory credit score to qualify
• Often requires collateral, putting assets at risk
• Can lead to accumulating more debt if spending isn’t controlled
• May come with fees or higher interest rates for those with poor credit
• Does not address the root causes of debt, such as overspending or poor financial education and habits

Credit Card Balance Transfer

A credit card balance transfer is a way to consolidate debt that involves moving high-interest credit card debt to a new credit card with a lower interest rate, often 0% for a certain period.

This means you can pay off your existing credit card debt without incurring interest charges – and pay down the principal balance faster while potentially saving money on interest.

The process involves applying for a new credit card that offers a balance transfer. If approved, you transfer your existing balances to the new card.

The promotional interest rate is usually 6 months to 18 months, depending on the credit card. During this period, any payments you make go directly to the principal balance since little or no interest is charged.

While balance transfers can be a good way to manage and pay down debt, they do have some drawbacks. Once the promotional period ends, the interest rate usually reverts back to a much higher standard rate – which can be the same or even higher than your original credit card rates. Also, most balance transfer cards have a transfer fee, which is usually 3% to 5% of the total amount being transferred.

While appealing to many people, a big drawback is that if you can’t pay off the transferred balance during the promotional period – you may find yourself back in the same cycle of high-interest debt.

Pros

• Offers a lower or 0% interest rate for a promotional period
• Can save money on interest payments if used effectively
• Simplifies debt repayment by consolidating multiple balances into one
• Provides a structured timeline to pay off debt within the promotional period
• May help improve your credit score by reducing overall credit card balances

Cons

• Requires a good credit score to qualify for the best offers
• Promotional interest rates are temporary; high standard rates apply afterward
• Balance transfer fees can add up, typically 3% to 5% of the amount transferred
• Risk of accumulating more debt if new purchases are made on the card
• Missing a payment can result in the loss of the promotional rate

Using Home Equity

Home equity debt consolidation means taking out a loan or line of credit against the value of your home. This allows you to tap into the equity you have built up in your property as collateral to get a loan at a lower interest rate than unsecured loans or credit cards.

There are two ways to use home equity for debt consolidation: a home equity loan (also called a second mortgage) or a home equity line of credit (HELOC).

A home equity loan gives you a lump sum of money that you pay back with fixed monthly payments over a set period with a fixed interest rate.

A HELOC is more like a credit card; you have a credit limit based on your equity and you can borrow as much or as little as you need, pay interest only on what you borrow. HELOCs often have variable interest rates which can change over time.

Using home equity to consolidate debt can save you a lot of money due to the lower interest rates which are usually much lower than credit card rates. It can also simplify your finances by combining multiple debt payments into one.

However, there are risks involved with this debt consolidation approach. Since your home is collateral, not paying the loan could mean foreclosure. What’s more, borrowing against your home reduces your equity, which could impact your financial situation and options in the future.

Pros

• Typically lower interest rates compared to credit cards and personal loans
• Fixed monthly payments with home equity loans provide predictable repayment
• Can consolidate multiple debts into one, simplifying monthly payments
• Potential tax benefits on interest payments in some cases (check local tax laws)
• Access to a substantial amount of funds depending on the home’s equity

Cons

• Puts your home at risk if you fail to make payments, potentially leading to foreclosure
• Reduces the equity in your home, impacting long-term financial security
• Fees and closing costs can be high for home equity loans and HELOCs
• Variable interest rates on HELOCs can lead to increased payments if rates rise
• Not suitable for those who have not built significant equity in their home

Other Debt Relief Options

While not strictly debt consolidation options, debt management programs, debt settlement plans, and consumer proposals are other consumer debt solutions that may also be worth thinking about if you’re struggling to manage your obligations.

Let’s take a brief look at each option – along with the pros and cons compared to debt consolidation options.

Debt Management Programs

A debt management program (DMP) is a repayment plan offered by credit counselling agencies to help you manage your unsecured debts (credit cards and personal loans).

In a DMP, the agency negotiates with creditors to lower interest rates and waive fees – consolidating multiple debts into one monthly payment made through the agency. There’s no new loan required – just disciplined budgeting and payments, often for several years.

Pros:

• No need to qualify for a new loan or use collateral.
• Reduced interest rates and fees negotiated by the credit counselling agency.
• Simplifies payments by consolidating into one monthly payment.

Cons:

• Requires consistent, on-time monthly payments for several years.
• Might negatively impact your credit score initially.
• No immediate reduction in the principal debt amount owed.

Debt Settlement

Debt settlement involves negotiating with creditors to pay a lump sum that’s less than the full amount owed to settle the debt.

This is typically used when you can’t make minimum payments and are seriously behind on your debts. Debt settlement can provide big relief by reducing the total debt but usually requires a lump sum, often harms your credit score and can sometimes have tax liabilities on the forgiven debt amount.

Pros:

• Can significantly reduce the total amount of debt owed.
• Provides a way to resolve debts without the need for a loan or collateral.
• May result in quicker resolution of debts compared to other methods.

Cons:

• Can severely damage your credit score due to missed payments and settlements.
• Requires a lump-sum payment, which might be challenging to gather.
• Not all creditors may agree to a settlement, and forgiven debt may be taxed.

Consumer Proposal

A consumer proposal is a legally binding agreement administered by a Licensed Insolvency Trustee (LIT). It allows you to negotiate with creditors to repay a portion of your debt over an extended period, usually up to 5 years.

Unlike debt settlement, a consumer proposal provides legal protection against creditors, with no wage garnishments or collection actions. It also reduces debt without the risk of losing assets – like bankruptcy may.

Pros:

• Legally binding agreement with creditors, offering protection from collection actions.
• Allows for partial debt repayment, reducing overall debt load.
• Does not require collateral and prevents wage garnishments.

Cons:

• Can negatively affect your credit score for several years.
• Requires adhering to a structured payment plan over several years.
• May involve fees for the Licensed Insolvency Trustee.

Which Option Is Right For You?

Everyone’s financial situation is different – so there’s no one-size-fits-all when it comes to working your way out of debt.

For some people, debt consolidation options will be perfect. However, they can often be hard to access if you’ve already fallen behind with payments and your credit score has been damaged as a result. If you do explore the debt consolidation process with a less-than-perfect credit score, it’s important to make sure any new loan or arrangement represents a better rate than you’re currently paying.

If debt consolidation options are impractical or just not feasible, it’s worth talking to a credit counsellor or Licensed Insolvency Trustee about the other debt-relief options. Again, the one that’s right for you will depend on your financial situation, but even if they represent some limitations in the short term, they can often help you achieve a more stable financial future.

Debt Consolidation Calgary: Key Takeaways

• Debt Consolidation Loans: Combine multiple debts into one loan with a single monthly payment, often at a lower interest rate. This option can simplify finances but may require good credit and collateral.
• Credit Card Balance Transfers: Move high-interest credit card debt to a new card with a lower or 0% interest rate for a limited time. It can save on interest but requires a good credit score and may have fees.
• Using Home Equity: Use your home’s equity to consolidate debt at lower interest rates. This can be effective but puts your home at risk if you fail to make payments.
• Alternative Debt Relief Options: Debt management programs, debt settlement, and consumer proposals offer structured ways to manage or reduce debt without new loans. Each has different benefits and potential impacts on your credit.
• Choosing the Right Option: The best debt relief method depends on your financial situation. Consult with a credit counsellor or Licensed Insolvency Trustee to explore the most suitable option.