Consumer debt levels in British Columbia are the second highest in Canada (only behind Alberta). Statistics Canada reports that the average non-mortgage debt load of a BC family is roughly $57,541 as of Q2 2022. Consumers are feeling the weight of their debt and are looking for ways they can pay it off more quickly. A 2023 study on consumer debt in British Columbia found that 71% of people surveyed felt that their debts were a problem due to experiencing overwhelming stress. It’s no wonder that in BC, debt consolidation has become a popular debt solution.
Debt consolidation loans are often used to help consumers get their debt under control. Those who choose this method take out one loan to pay off all their consumer debts. Typically, the one payment they have left after consolidation has a lower interest rate than the average interest rate on all their debts prior to consolidation. BC residents, on average, have $122.80 of debt for every dollar they have in disposable income. Thus, lowering the interest rate through debt consolidation loans frees up a greater portion of a household’s disposable income for other uses.
What is Debt Consolidation?
Debt consolidation is a way to combine multiple higher interest bills into a single, lower interest, monthly payment. It is a financial solution that makes it easier to pay off debt and work towards becoming fully debt-free. Due to the lower interest rate, you will be able to save more money and free up some cash flow. This also helps you get out of debt faster, even though your monthly payments are likely to be less than before.
A 2023 study on BC Consumer Debt noted that 58% of those surveyed said that credit card debt was their main type of debt. This was almost 5 times more than the next debt type. Credit card debt is also one of the most common reasons to opt for debt consolidation. The most popular method of debt consolidation is by taking out a debt consolidation loan. There are other viable solutions as well, like credit card balance transfers, lines of credit, HELOCs, and debt management programs.
Debt Consolidation Considerations
Consolidating debt for residents in BC clearly has many advantages, but debt consolidation is not necessarily the best choice for residents who want to pay down their debt. Lowering the principal along with the interest rate can help you pay off your debt even faster, but under BC debt consolidation, most lenders will not reduce the principal amount that you owe. Like any financial decision, consider the benefits and drawbacks before you sign up for a solution.
A notable benefit compared to many other debt strategies is that you contact creditors directly. After you receive the lower interest loan funds, you use them to pay off your debts in full. All that remains is your monthly payment towards the debt consolidation. You will be able to avoid payment pressure, collection calls, and financial stress. You will only need to focus on the single monthly payment. This frees up your cash flow so you can create a budget and build your savings.
All debt consolidation solutions involve paying off your debt in full. That’s why it has no long term negative effect on credit score. The consistent monthly payments will help boost your credit score. If you keep up regular payments and don’t take on any new debt, you will have an even better credit score by the time you fully pay it off.
Debt Consolidation Options in British Columbia
There are many approaches towards debt consolidation, and all of them involve paying off your debt in full. The appeal of debt consolidation is the lower interest rates, which most often lead to lower monthly payments. You can get out of debt sooner, and improve your credit in the process.
There are a few different methods for debt consolidation in BC:
- Debt Consolidation Loans
- Credit Card Balance Transfer
- Lines of Credit, or LOCs
- Home Equity Line of Credit, or HELOC
- Credit counselling and debt management plans
Which consolidation option is right for you? Some, like debt consolidation loans, have eligibility criteria of regular income and a good credit score. Some, like HELOCs, increase your risk exposure. Consider the pros and cons for each, and see how an option fits into your specific situation. If you’re considering debt consolidation in British Columbia, reach out to us for a consultation. We’d be happy to help you figure out whether debt consolidation is a viable option for you.
Consumer Proposal In British Columbia
A consumer proposal is a debt settlement arrangement. It is considered a preferable alternative to filing for bankruptcy in BC. You can file a consumer proposal in BC through a Licensed Insolvency Trustee, or LIT. The LIT will negotiate with creditors, and put together a legally binding agreement. You would pay much less debt than you initially owed.
Consumer Proposal vs Debt Consolidation
If you’re able to keep up with your bill payments and have a good credit score, debt consolidation might be a better option. Keep in mind that you will still need to pay the full amount. The good news is, if you qualify, you may get a lower interest rate. Debt consolidation has a negligible effect on your credit score.
If you’re unable to make your payments and have a high amount of unsecured debt, a consumer proposal might be a better fit. Your debt could be reduced by 70% to 80%. You need to be able to show that you’re not in a financial position to pay your debts. You will have an R7 rating on your credit report, which affects your credit score. This means limiting your credit options to those with high rates of interest if you choose to borrow anything while your score is still low.
Having a consistent source of income makes it easier to qualify in both cases.
Debt Settlement Program in BC
A debt settlement program offers you the ability to lower both your principal and your interest payments. When you negotiate a debt settlement with creditors, you have an excellent chance of actually owing less money than if you were to choose debt consolidation. The drawback to debt settlement is that it negatively affects your credit score since you’re only paying back part of the principal, and not the full amount. Conversely, debt consolidation can actually help your credit score once you’re making regular payments.
Debt Settlement vs Debt Consolidation
The major difference between debt consolidation and debt settlement is how much of the principal you pay back. With consolidation, you pay back the full amount. With debt settlement, you only pay part of the principal. This affects your credit score for up to six years.
Sometimes, companies may mislead customers by misrepresenting a solution as consolidation, but it turns out to be debt settlement instead. It is important to do your research on the legitimacy of the company and the viability of the solution before you sign any paperwork.
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Frequently Asked Questions
How can I qualify for a debt consolidation loan?
If you can show consistent income and have a good credit score, you should be able to qualify for a debt consolidation loan in British Columbia. Your credit score must be a minimum of 650. If your credit score is excellent at 720 or higher, you may be offered a lower APR. A lower APR means you will get a lower interest rate, so you can save on interest payments.
Can I consolidate credit card debt?
Absolutely, you can consolidate credit card debt in BC by the process of debt consolidation. With this, you can combine your credit card bills into one monthly payment, often at a lower rate of interest. A lower rate will help you reduce the amount of interest you’d have to pay. It also often reduces the time it takes to pay off your debts.
Is debt consolidation right for you?
Debt consolidation may be right for you if you:
- are able to manage your payments,
- have good credit, and
- can show a consistent income.
If you say yes to these three things, you could consider debt consolidation. You may be able to reduce your total owed debt and pay off your debts faster.
Does debt consolidation affect my credit score?
Overall, your credit score is likely to improve over the course of the consolidation loan. You may even see a boost when you pay it off in full.
However, your credit score will drop right at the beginning. This is because new credit applications require a hard credit check. This causes a minor drop of less than 5 points and only stays on your credit score for a few months.
Can I get debt consolidation with bad credit?
It is possible but not very likely to get debt consolidation with bad credit. Even if you manage to qualify for one, you will be offered a relatively higher interest rate. This may not be a justifiable difference from what you currently pay. It is recommended to take a few months to improve your credit score before applying for debt consolidation in BC.
Home equity lending options are an alternative if you have bad credit, but they increase your risk exposure on your home. Other options are debt management plans or consumer proposals. However, they negatively impact your credit to varying degrees.