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How Debt Consolidation Works (and Saves you Money)

People are often confused about what debt consolidation is, exactly. Is it a loan? Is it writing off my debt? Is it borrowing against my home? Debt consolidation through Solutions Credit Counselling is actually none of these.

The way our debt consolidation program works is this: we take a scheduled debt payment from you, our client, and then disburse that money to your various creditors who are placed on the program. You are able to make just one set payment, rather than several payments to different creditors with various amounts and dates, so repayment is simplified for you.

Simple is nice, but what are the other benefits of debt consolidation?

No More Harassment. If you are being contacted by your creditors or debt collection companies, you will be relieved that their communication to you must cease. We will deal with them on your behalf.

Repair your credit rating. When you have bad debts that are in arrears and have gone into collection, those are rated R9 on your credit report, the lowest rating given to debt. Once you add those debts to a debt consolidation program, they are bumped up to R7 – meaning that a repayment program is in process. Depending on the Credit Bureau two years after the debts are paid in full, they can be completely removed from your credit report and your credit score improves significantly.

Simple payment, no harassment, and improved credit rating are some really great benefits of debt consolidation, and so is saving money. When you add a debt to our program, we will negotiate with that creditor to reduce and often remove interest charges on the debt during repayment. We typically are able to reduce interest to 0-5%, with the majority of debts going to 0% interest. Depending on the amount of the loan, the interest rate and the repayment term, you will save thousands of dollars in interest, compared to repaying (or avoiding) the debt on your own.

This all sounds great, but what is the catch?

There are rules in Canada governing debt consolidation programs. In order to qualify, the debts must not be tied to any assets that you possess (car loan or mortgage etc.). These are known as “unsecured debt”, such as payday loans, credit card debt, department store cards, lines of credit, utility bills (cell phone, hydro, etc) and more.

Here’s the other catch: you must be able to repay those debts within 5 years, that is the maximum length of the debt consolidation program. So if your debt load is high and income is too low, you may not be able to repay in full within 5 years. If this is the case you may wish to speak with our counsellors about debt forgiveness and debt reduction programs.

And now we are really going to SHOW you how debt consolidation works and saves you money – with a breakdown of a realistic scenario:

Let’s look at a typical debt picture of a woman we’ll call Erica. She lost her job and was out of work for several months. She has a new job now but she’s falling behind on her debt payments. Here is a breakdown of her debt:

Credit card #1: $5,146 @ 19% interest

Making only minimum payments, it would take 17 years and 8 months to pay off and cost $5,408.87 in interest.

Credit card #2: $3,731 @ 21%

Making only minimum payments, it would take 17 years and 7 months to pay off and cost $4,780.50 in interest.

Department Store card: $738 @ 21%

Making only minimum payments, it would take 6 years and 10 months to pay off and cost $590.28 in interest.

Payday Loan: $590 @ 25% fee per $100 (= $147.50), plus 21%

Payment due in 14 days is $737.50. If not paid on time, add $30 NSF, plus 21% interest, as well as bank NSF charges every time the payday lender hits her bank account for payment.

Making only minimum payments, it would take 7 years and 1 month to pay off and cost $631.43 in interest.

Her debts total $10,235. If she were to make only the minimum payments to pay her debts, she would pay $11,411.08 in interest.

Instead, Erica calls Solutions Credit Counselling for help. After going through her debts, income and family budget in a private consultation, we place her debts on our debt consolidation program.

We negotiate the interest rates with her creditors and we arrive at the following solution:

Erica’s monthly payment on our program will be $250, she will be debt free in 4 years and 10 months, and she will save $7,217.78!

So there you go, Solutions debt consolidation program will help you repay your debt in full within 5 years or less and save you thousands of dollars in interest. Call to talk to a Solutions credit counsellor today to see what we can do for you: 1-877-588-9491.

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