The Secrets Behind Personal Debt Consolidation Loans in Canada

If you’re try to get a personal debt consolidation loan, you may have noticed that many companies are selling products and services relating to consolidation loans that promise to solve peoples’ debt problems. These range from traditional style loans, to second mortgages, to debt repayment programs, to debt relief programs. Our concern is that many people are signing up for these loans and programs without being made aware of all their options, the long term impacts of some of these services, and the somewhat hidden aspects of these services that no one talks about – such as privacy, permanent legal records, impact on future employment, unnecessary fees, super high interest rates, and success rates. Once you are aware of these issues, you can approach debt consolidation from a more informed perspective and hopefully make a choice that will truly improve your finances in the long run.

Issues of Privacy, Permanent Legal Records, Impact on Future Employment

Many debt relief companies are now promoting ways to consolidate debt and at the same time repay only a portion of what you owe – sometimes advertising they can eliminate 70% to 80% of your debt. We are concerned that many of these companies are playing up the huge advantages of their service but are not also fully making their clients aware of the potential consequences that can come with this package.

Here’s what you need to know:

Any service that resolves your debt through a legal process is not private. When a legal proceeding is filed, it becomes a matter of public record. So if keeping your debt issues private is important to you, you need to be aware of this.
All legal processes that result in the reduction or elimination of debt result in a permanent legal record that is searchable online to anyone for an $8 fee.
When you reduce or eliminate debt through a legal process, this can potentially impact future employment opportunities.

Having raised these issues, we should point out that sometimes entering into a legal process to reduce or eliminate debt is the best option for some people. However, everyone should be fully informed about the ramifications of their decision so they can make an informed decision that they are comfortable with.

Unaccountable, Unqualified Experts Push Services & Charge Unnecessary Fees

Some consolidation service providers label themselves as “Debt Consultants,” “Debt Relief Specialists,” “Restructuring Specialists,” and other such helpful sounding terms that make them sound like experts. However, these people often have no formal financial training, no previous professional experience in personal finance, are not accredited or certified by any recognized organization, and are not accountable to any national body or association. To make things worse, many of these people try to make themselves appear as though they are qualified and certified to offer legal solutions to debt problems – some of them even calling their services “government approved” (which is misleading).

The truth is that only someone who is properly licensed can provide debt relief or “consolidation” options that involve the legal system, and this person can only be bankruptcy trustee across most of Canada (in Alberta it can also be an administrator of the Orderly Payment of Debts program).

More and more, we’re finding that these “Consultants” or “Specialists” are then charge their client fees amounting to thousands of dollars for what we would call nothing. The client thinks the money is for a service, but nothing really happens until the consultant or specialist walks the client down the hall to a separate, independent, bankruptcy trustee (although some companies try to obscure this fact) who then provides the client with a legal debt relief service along with his or her fee of around $1,800 (the trustee also keeps 20% of all your monthly payments to them if they file a consumer proposal on your behalf). In the end, the client could have probably found a more reputable trustee and saved a lot of money by just looking up a bankruptcy trustee on the internet. Some debt relief companies go so far as to call the bankruptcy trustee they work with a “court officer.” This is also highly misleading.

Another aspect of many of these services that is troubling is how they don’t provide people with all their options and strongly push the advantages of the one option that makes their company the most money without making sure this option is in their client’s best financial interest or fully informing their client of the disadvantages of the “solution” they are selling. In our view, there are usually a few reasons for this:

Most of these companies don’t offer debt consolidation loans or a full range of consolidation or debt relief options.
Most of these companies exist to make money. So they are typically going to push the “solution” that makes them the most money for smallest amount of work.
They pay their “Consultants” or “Credit Counsellors” on commission. So these sales people are naturally going to try and sell whatever is going to pay them the most money.

Super High Fees and Interest Rates Charged for Personal Loans to Consolidate Debt

Some finance companies advertise that they’re a great place to get a loan or that they’re the best place to use the equity in your home to take out a second mortgage and pay off debt. But what they don’t tell you up front is that their interest rates are many times higher than the bank personal loan rates, and it’s normal for some of these finance companies to charge up to 47% interest. On top of all this, they charge super high fees that when added to the loan interest rate put the cost of borrowing through the roof. If you take the time to calculate the numbers (the interest rate + the fees = a way higher annual interest rate), many times consolidating debt in this fashion isn’t that much better than leaving the debt on your credit cards.

Success Rates Matter with Consolidation Loans & Other Debt Consolidation Options

Most people don’t realize this, but the majority of personal debt consolidation loans don’t help people get out of debt. Some financial experts estimate that up to three quarters (75%) of people who take out debt consolidation loans to consolidate bills and credit card debt, rack up the debt again within a few years of taking out the loan because they didn’t change their behaviours that got them into debt in the first place. If you want to make sure you don’t end up like one of these people, you need to create and follow a spending plan, establish an emergency savings account, learn to live on less than you earn, and save money for your future.

If you’re looking at a debt management or debt reduction program of some sort (alternatives to debt consolidation loans), make sure to ask about their success rate. If you’re not confident you’re getting a straight answer, try another service provider. Across Canada, success rates can vary greatly between service providers offering the same service. There can be a number of reasons for this. Service providers who try to sign up as many people as possible will have low success rates because not every debt repayment option is the right fit for everyone. Companies or non-profits who are careful only to accept the right people onto their programs and provide ongoing one-on-one support to their clients tend to have higher success rates and clients who are more successful with their finances and credit in the long-run.

What Should You Do?

While we seem to portray debt consolidation programs and loans in a dim light here, it’s not all bad. In fact there is a lot of good going on. These are just the industry’s dark secrets that you should know about.

All the different ways you can consolidate your monthly payments or debt are actually tools that each have their own proper place and can work very well for people when applied properly to specific situations in the right way. The trick is to find if some form of debt consolidation is right for your situation, and if it is, which option is best for you. You need to find the option that will help you accomplish your goals, get your finances back on track, and not have any side effects that you’re uncomfortable with.

Our best recommendation is that you find a local non-profit credit counselling service and make an appointment to speak with one of their professionally accredited Credit Counsellors. Appointments are confidential, usually free of charge to the public, and can often be done over the phone if that works better for you. One of these non-profit Credit Counsellors can help you look at your situation objectively, go through all your options with you – including consolidation loans – and help you figure out your best course of action. In the end, you can decide if a debt consolidation loan is right for you or if another form of consolidation will work best for your financial situation and your future.

Here’s where you can find a local non-profit credit counselling service near you.

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