Are you ready to get a handle on your finances and end the stress you are experiencing from debt? Debt management could be the answer for you.
No doubt, debt is a part of life in our society. It helps us get an education, buy a house, buy a car and even grow our business.
Most people have to take out loans to fulfill their basic necessities in life. But a large amount of debt can often seem like a burden.
Effective debt management is a stepping stone to improve your wealth and accomplish your dreams.
People who are in debt are more likely to have a difficult time managing their health and behave in ways that affect their actions and their decision-making process. However, it is a problem that can be overcome.
There are several ways of paying off your debt faster, such as debt management plans, debt consolidation, and debt settlement. However, not every option is going to suit your situation.
Because of this, I write this guide to help you understand the option that suits your situation and budget.
What is Debt?
Debt is the state of owing money or something so as to fulfil a need that you can’t otherwise meet. A debt may come with interest rates attached, which means the more you borrow, the higher the interest rate.
Debt can be good or bad. Debt incurred with the aim of building wealth or improving your income, such as mortgage loans, student loans, or business loans, is considered good debt.
On the other hand, bad debt includes things like consumer debt or credit cards that contribute less towards improving your financial condition.
Having debt makes it impossible not to worry about how you’ll repay your obligations or how to keep yourself from taking on new debt.
A burden of debt can cause health problems ranging from depression, migraine, ulcer, and even heart attack.
However, not all debts are the same. That’s why it is important to know the various types of debt to know the one that suits your situation.
4 Common Types of Debt?
Here’s an overview of the four common types of debt:
Secured debt refers to a debt that’s secured with assets for collateral reasons.
Usually, the lender will conduct a check on your credit to see how responsibly you handled previous debts. However, the asset is secured so as to protect the lender should the borrower fail to repay the loan.
In the event of non-repayment, the lender has the right to seize the asset.
Car loans are typical examples of secured debt. The lender not only provides the money to purchase them but also claims ownership of the cars’ title.
If the car buyer fails to meet the payment requirements, the lender can seize the car and recover the funds by selling it.
This type of secured loan has a relatively fair interest rate that is based mainly on the collateral value and creditworthiness.
Unlike secured debt, an unsecured debt does not have collateral. Lenders who provide unsecured loans rely solely on the borrower’s ability and vow to pay back the loan.
Under the contract, the borrower is legally obligated to repay the funds, and in the event of a default, the lender can file a lawsuit to recover the funds owed.
Nevertheless, doing so is quite costly for the lender. Thus, unsecured debt often comes with a higher interest rate.
Examples of unsecured debt include signature loans, credit cards, medical bills, and a gym membership contract.
Revolving debt is a form of debt that enables the borrower to borrow an amount up to a certain maximum limit repeatedly. A revolving debt’s payment amount depends on the amount currently on loan.
Lines of credits and credit cards are some of the examples of this type of debt. Consumers can easily spend as much or as little as they would like under the limit on their card.
Revolving debt can be secured and unsecured, as in the case of credit cards and home equity lines of credit.
The biggest debt many consumers carry is a mortgage. Mortgages refer to loans that are used to purchase homes using real estate as collateral.
An interest rate on a mortgage is generally among the lowest of any consumer loan product. The interest is usually tax-deductible for individuals that itemize their taxes.
For homeowners, 15-year and 30-year mortgages are the most common because they make monthly payments affordable.
Secured vs Unsecured Debt: What You Should Know
The different types of debt can be categorized into two: secured debt and unsecured debt. The differences between them are extremely important.
Knowing the differences between secured and unsecured debts will help you distinguish between them and develop the right repayment plan for both types.
Remember that secured debt is a debt whereby a creditor lends a borrower money or something based on a security interest in the collateral.
This implies that the creditor can take possession of the collateral to satisfy the debt should the borrower fail to repay the loan.
On the other hand, unsecured debt is one for which the creditor lacks a security interest in collateral, and therefore the creditor has nothing to seize to satisfy the debt without legal action.
In the event you fail to pay the loan, the creditor cannot take any action without filing a lawsuit and getting a judgement against you.
The big takeaway here is knowing the difference between secured and unsecured debt and bearing in mind that you usually have more to lose when you have secured debt. As a result, secured debt should be your main repayment priority.
However, this is not always the case. If the asset is not so important, it may make sense to prioritize your unsecured debt.
What is Debt Management?
Debt management simply refers to the act of controlling your debt through financial planning and budgeting. The major objective of debt management is to get rid of your debt by reducing it and eliminating it totally.
Even though debt management can be a valuable tool for eliminating your debt, it doesn’t work like magic. In order for debt management to work, you will need to have enough income to cover your existing bills.
It is important to have sufficient income in order to pay off your existing bills if you want debt management to work for you.
Although the monthly payments and interest rates can be reduced through a debt management counsellor negotiation, you still have to pay your bills regularly.
In addition to having a negative impact on your credit score, missing a bill may lead to the cancellation of your negotiated repayment plan, bringing you back to square one.
Top 4 Benefits of Debt Management?
Debt can seem like an insurmountable problem and an inevitability everyone will experience at some point in life. This makes debt management paramount for every debtor,
There are many benefits to debt management that are worth exploring. These benefits include but are not limited to a good credit score, risk reduction, income increase, and better job prospects.
Let’s look at them one after the other.
A Good Credit Score
Your credit score will be negatively affected if you have too much debt. As your credit cards and loans reach the limit, your score will dip.
The higher interest rates you pay year after year due to a bad credit score can cost you thousands of dollars, making it hard to be debt-free.
On the other hand, as you pay off debt, you improve your credit score. This improvement leads to numerous benefits, including:
- Lower insurance premiums
- Favourable interest rates on future loans
- A good chance of securing an apartment
One of the most dangerous aspects of living in debt is the risk it inflicts on your life. If you’re in debt and don’t have any savings, you’re just one step away from financial ruin.
If you lose your job or have a major medical emergency, you might not have the capacity to pay back your debt. This could lead to:
- Collection agents constant calls
- Having your wages garnished
- Having your car seized
- Losing your property or being evicted
By eliminating your debts, you remove these risks. This allows your budget to breathe as you don’t have to worry about any unexpected event that will ruin your life or finance.
With a lot of debt, you have to pay off a big chunk of your income. Let’s say you have a $200,00 30-year mortgage at 4.5% interest.
You will have to pay more than $1,000 in mortgage payments each month, and almost half of this will be a channel on interest, on your property’s equity.
But in the event you pay off the debt quickly, your income will increase by more than $1,000 per month.
That means you’d have more than $12,000 a year to spend on all the things you care about.
You could afford to remodel your kitchen, spend more money on your hobbies, or take a vacation every year.
Better Job Prospects
Being in debt can also hinder your productivity at work. Money worries may cause you to have trouble sleeping, making you much less productive at work.
When you have to deal with debt collectors, the problem is more intense. You would likely receive their calls at your workplace, interfering with your job and limiting your productivity.
You could lose your relationship with your boss if you let debt collectors contact your employer directly.
On the other hand, paying off your debt keeps you motivated to work harder. When you get to save your money instead of channelling it to debt payments, you’re much more motivated to work hard.
In addition, if you spent years in a job you didn’t like because you had to pay those credit card bills, being debt-free allows you to look for a new, more fulfilling job.
Debt Management in Ontario
There are two main types of professionals who offer legal debt management services in Ontario: These are:
- Federally licensed bankruptcy trustees
- Members of the Ontario Association of Credit Counsellors
They both offer credit counselling, but the plans they offer vary greatly. The plan you like is determined by the amount you can afford to pay back.
Members of the Ontario Association of Credit Counsellors offer a debt management plan (DPM), which is designed to help those who are experiencing financial difficulties.
These non-for-profit credit counsellors provide budget assistance to help you reduce your expenses and to also manage your budget effectively.
The credit counsellor for your debt management plan will engage your creditors and create a repayment plan for you.
In the event that your creditors accept your debt management plan, you give your credit counsellor the monthly agreed payment, who will disburse the money to all your creditors.
What is a Debt Management Plan?
A debt management plan (DPM) refers to a program or service for debt repayment provided by a credit counselling agency. It is a strategy for repaying loans in full over a five-year period.
A debt management plan has numerous benefits. Here are just the major benefits of a debt management plan:
- Make a single payment per month to all your creditors
- Payless interest or zero interest charges on your debt
- Clear your path to debt freedom
- Gives you the support and ideas you need to speed your debt repayment.
Under a debt management plan, a nonprofit credit counselling agency combines your unsecured debt so that you make only one payment per month to your creditors through the agency.
Afterwards, the agency distributes your payment to your various creditors, with the biggest creditors receiving more of your payment than the rest.
However, when you meet with a credit counsellor for the very first time, they will assess your financial situation and your debt to determine if:
- You are eligible for a debt management plan.
- Your creditors will likely accept a debt management plan.
- You can meet your monthly payment.
After you make a decision to move forward, the credit counsellor will contact your creditors and negotiate a settlement that suits your situation and apparel to your creditors.
When your creditors approve your credit counsellor’s proposal, you will begin making monthly payments to your credit counsellor, who will directly disburse to your various creditors.
Once the outstanding balances are paid in full, you will no longer owe any money to the creditors who participated in the debt management plan.
Upon payment of outstanding debts, you are no longer entitled to make any payment to your creditors. Congratulations, you are now debt-free!
3 Practical Steps on Debt Management Plan Canada
A debt management plan could be the solution you need to get control of your finances. You’ll finally be able to pay off debt and start saving for a better future.
Here are the three simple steps of a debt management plan.
Step 1: Consult a Credit Counsellor
In order to enroll in a debt management plan, the first step is to find out whether you’re eligible. This means getting a free debt and budget evaluation from a nonprofit credit counselling agency.
To assess your debts and budget, a credit counsellor assesses your debts and credit report.
Then they explain all of the options available that could help you get out of debt. This could include:
After that, the counsellor discusses all the options you have to get out of debt. This may include:
- Debt management plans
- Settlement programs
- Consolidation loans
- Consumer proposals and bankruptcy
Your credit counselling agency can help you enroll in a debt management plan directly if that’s the suitable option for your situation.
At the end of your consultation with the credit counsellor, he or she will tell you the estimated monthly payment amount. If you choose, you can enroll right away or take time to decide.
Step 2: Enroll in The Program
Upon deciding to enroll in a debt management plan, your credit counsellor will ask for details related to your debt, including:
- Your creditor names
- Their account numbers
- Your current balances
- Your account status (whether current, late, or charged-off)
Once your credit counsellor has determined the monthly payment that works for your budget, they will contact your creditors and start negotiating. During the negotiation, your counsellor will aim to:
- Make your creditors accept a lesser monthly payment on your debt management plan.
- Limit or eliminate the annual percentage rate (APR) of your balance.
- Put an end to any additional penalties or charges.
Until each creditor consents to the terms of your DPM, you can’t officially start your plan. You’ll get acceptance letters from every creditor that approves.
At this time, ensure you are making minimum payments on your accounts. The credit counselling agency will inform you as soon as all your creditors have agreed on the terms and when the payments will begin.
Step 3: Complete Your Plan
When your debt management plan starts, you’ll be paying the credit counselling agency once per month.
Then the payment is distributed to your creditors according to the agreement. The fees are fixed, making it easier to maintain your budget.
In addition, you can work with your counselling team to make a payment due date that suits your income so as to your remaining bills.
As long as you’re in the program, any lines of credit and credit cards you add will be blocked.
It means you can no longer charge with those cards. Your credit report indicates that the payments are being made through a debt management plan.
While you’re in the program, you can’t open credit cards. You can be eligible for secured credit, like an auto or mortgage loan. However, this will be determined by your credit score and other factors.
Your credit counselling agency can help you set up an affordable budget during the program so you won’t have to rely on your credit cards to live.
Also, they will enhance your financial literacy, which will help you improve your financial habits in the future.
As a result, you’re better equipped to manage your debt in the future once you’ve completed the program.
Why Should You Consider Debt Consolidation?
Debt consolidation refers to the method of using several sources of funding to pay off existing debts and liabilities.
When you have a manageable amount of debt and want to reprioritize several bills of varying payments, interest rates, and due dates, debt consolidation is a viable option you can consider.
This will assist you with reducing your overall debt and reorganizing it in order to pay it off more quickly.
The majority of people begin by applying for a debt consolidation loan from their bank, credit card provider or credit union.
It’s a good place to start, particularly if you have a positive relationship with your organization and a track record of timely payments. If you are declined, consider private mortgage firms or lenders.
Creditors are most often ready to do so for a variety of reasons. Consolidating loans increases the chances of collecting from a debtor.
Although these loans are typically provided by financial institutions such as credit unions and banks, some specialist debt consolidation service providers also offer these services.
Even though debt consolidation interest rate and monthly payment may be lower, it is important to consider the payment plan. Pay schedules that are longer in duration result in higher overall costs.
Hence, if you’re considering consolidation loans, it is important to contact the credit card provider to know the time required to repay debt based on the current in relation to the loan.
5 Ways to Consolidate Your Debt?
Do you have a lot of debt that you would like to simplify into one payment? Did you know it can be so easy to do? Even if you didn’t, now you know that you can consolidate your debt through;
If you have a mortgage, you may want to determine whether you have more equity in your home to consolidate your debt using your mortgage.
This is typically the preferred alternative because mortgage interest rates are often lower compared to other types of loans, and mortgages take over 25 years to pay off.
This enables you to make much smaller monthly payments than you can for any form of a loan.
If you follow this option, you should make a concerted effort to pay off the additional mortgage as soon as possible and avoid doing so often.
If you are fun of doing this every year or after every two years, it means you are spending beyond your earnings, and paying off your debt at this pace would take an eternity.
Debt Consolidation Loan
You can get a debt consolidation loan from your bank or credit union.
Banks and credit unions will normally lend individuals up to 10% of their net worth on an unsecured condition.
However, when the economy is booming, and jobs are plenty, some banks can lend individuals large sums of money without needing collateral, although this is the exception, not the norm.
Most Canadians attempt to get consolidated credit payments so as to address financial difficulties and pay off their debt.
However, if you do have a monthly spending schedule and an effective budget, you’re more likely to continue depending on credit and accumulating debt rather than paying it off.
Family Members or Friends
If a credit union or your bank is unable to assist you, you can approach a family member or friend to see if they borrow you the money you need to consolidate your debts.
However, even if your “wealthy” relative declines, do not be offended. Everyone has the freedom to spend their money as they want.
Perhaps your relative’s finances may be tight at the moment —despite the fact that they seem prosperous to you. Besides, borrowing money from a family member is so risky.
If a family member borrows your money and you then lose your work or get injured which makes it difficult to repay them, this can damage your relationship with them especially if they can’t forgive the loan.
Your relative may not want to place themselves or you in this position. This could be another reason they are reluctant to borrow you money.
As a result, do not keep anything against them. If a relative is willing to borrow your money, be sure to honour your deal by making all agreed-upon payments on time.
If you are unable to locate a debt consolidation firm for a suitable debt consolidation loan, you could consolidate the balance of all of your credit cards into one low-interest rate card and only pay off a predetermined amount to this card aggressively per month.
For instance, a credit card minimum payment might be $50, so if you plan to make monthly payments of $500, you can pay off the balance in a fair period of time.
The best Canadian Credit cards occasionally offer very low discount interest rates. Certain individuals take advantage of these opportunities to consolidate their debts.
Although this can be helpful at times, however, credit cards provide such promotional rates because most borrowers fail to pay off their balances on time and therefore end up paying a higher interest rate after the promotional rate ends.
Most credit card providers also provide low-interest credit cards to those who qualify.
However, oftentimes people who need them desperately are disqualified because their credit score is insufficient or they have an excessive amount of debt. If this is your case, then other debt consolidation options.
Line of Credit or Overdraft
Consult your bank or credit union to confirm whether you’re eligible for a line of credit or overdraft. Generally, they want you to have an excellent credit score, a stable wage, in addition to good net worth (though this is not often necessary).
There are secured and unsecured lines of credit and overdrafts available. It depends on the circumstances and the loan policies of the bank at the moment.
Note that lending policy changes regularly based on the underlying factors affecting the economy.
A line of credit and an overdraft are almost synonymous terms. They both convert your debit card to a credit card, allowing you to spend money you do not own up to a predetermined amount.
Like a credit card, you are only required to make a minimum monthly payment for your line of credit and overdraft.
Debt Consolidation Services in Canada
There are four major debt consolidation services available in Canada. This include:
1. Debt Management Plans
As you mentioned earlier, you can consolidate your debt with a debt management plan (DMP) which is provided through a credit counselling agency.
Like other debt consolidation programs, you also make a single balance payment on DMP. Additionally, your credit counsellor will be able to negotiate an interest rate reduction or interest elimination.
Your credit counsellor will work with you to establish a payment plan that will allow you to pay off all your debts within five years.
A debt management plan does not have debt forgiveness. So over the time frame of the program, you must be able to repay your complete debt.
2. Debt Consolidation Loan
Recall that a debt consolidation loan is a type of loan that enables you to pay off your multiple debts.
For instance, if you have three credit cards and secured a debt consolidation loan, you can pay off all the credit cards through a single monthly payment rather than three.
A debt consolidation loan may be in the form of a second mortgage on your house (also known as a home equity loan), a bank loan, or a line of credit, that is backed by another asset or through the guarantee of a family member or friend.
To be eligible for a debt consolidation loan, you must meet the following requirement:
- Provide a copy of your monthly budget.
- Have a steady source of income.
- Provide collateral or co-signor.
- Provide your consolidated payments.
3. Debt Settlement Programs
Numerous debt consolidation firms exist in Canada, providing a wide range of debt settlement services.
They are not after providing you with a debt consolidation loan. Rather, they are after consolidating your loans (basically credit card debt) into one payment from their agency.
Some may demand substantial up-front payments and may or may not be effective in resolving your debts with your creditors.
My advice is to exercise caution when working with any organization that is not authorized or certified.
If you have only one or two creditors, you can be able to settle your debt effectively on your own.
The benefit of dealing directly with your creditors is that you escape any undue additional costs. You will be right away that you have their consent.
This reduces the disappointment that you may face if you enter into a deal with a debt settlement firm that fails to negotiate a better deal with your creditors instead, direct you for a free consultation with a Licensed Insolvency Trustee.
4. Consumer Proposal
A customer proposal is a legal document that is handled by a Licensed Insolvency Trustee (LIT), helping you negotiate a better deal with your creditors.
The LIT will collaborate with you to formulate a proposal that will be submitted to your creditors with the aim of convincing them to accept a proportion of what you owe them or to prolong the period you have to repay the loans or to do both.
There are many reasons that a customer proposal could be a better debt management option when consolidating your credit into a lower single monthly payment. These reasons include:
- A consumer proposal deals with unsecured debts.
- It permits a lower single monthly payment.
- A consumer proposal can eliminate interest rates.
- There is no loss of assets or security.
- A consumer proposal provides debt relief.
- A consumer proposal limits creditor actions such as wage garnishment.
Debt Consolidation Services in Ontario
Ontario debt consolidation can assist you in escaping from the burden of debt at a time when you need it most.
There are several debt consolidation options in Ontario. You can consolidate your debt in Ontario through the following ways:
1. Visit Your Financial Institution
As a member of a bank or credit union, you can qualify for some of the lowest available interest rates. You may, however, be required to pledge one of your properties as collateral.
2. Contact an Online Lender
There are several legitimate online lenders who can provide you with a low-interest loan. However, it is important to go for one that meets your requirements and can work with your budget.
3. Speak to a Non-Profit Credit Counsellor
At times consulting a consultant is the easiest way to obtain the assistance you need to get the process started. A non-profit counsellor will assess your financial condition and make suggestions for a perfect and practical course of action.
6 Tips on How to Manage Your Debt
If you are struggling with managing your debt, bear in mind that you are not alone.
There are a lot of people that struggle with debt, but many are not sure what they can do about it. They do not want to admit that they have a problem and face the reality of their situation.
Managing your debt is a lot easier than you might have thought. Here are six practical tips you can follow to manage your debt cost-effectively.
1. Know How Much You Owe
To manage your debt effectively, it is important to first create a list of your debts, identifying the creditors, the overall amount owed, the monthly payment amount, the interest rate, and the due date.
Your credit report can help you identify all your debt. Taking note of all of your loans enables you to see the larger picture and maintain knowledge of your entire debt obligations.
A debt reduction software program may assist with this process. Don’t just build a list and then abandon it. Take a look at your debt list on a regular basis, especially when you pay bills.
Also, you need to update your debt list every few months to reflect changes in the overall sum of your debt.
2. Create a Budget
Another critical step in debt management is budgeting. You may either use personal finance software such as Mint or create your own Excel spreadsheet to track your monthly income and expenditures.
Then, examine those expenditures to see where you can reduce your expenses. If you do not make budget cuts, you are putting yourself in a deeper hole.
3. Make at least the Minimum Payment
If you are unable to make an extra payment, at the very least, ensure that you deposit the minimum payment.
Although making just the minimum payment does not help you make any strides toward loan repayment.
However, it saves you from the penalty of late or zero payments. When you get behind on payments, it becomes more difficult to keep up, and your accounts will inevitably default.
4. Pay Your Bills on Time Each Month
Late payments make it more difficult to repay your loans, and you’ll be charged a late fee for any missed payment.
In the event that you skip two consecutive payments, your finance costs and interest rate will increase.
Enter your payments into a calendaring device on your phone or computer and set the alarm to notify you days ahead of the payment date.
If you are late with a payment, send it as soon as realized. Do not delay for the next due date to submit it; otherwise, your account will be reported to a credit bureau.
5. Build an Emergency Fund
Without savings, you will be forced to incur loans to fund an emergency bill. Even a limited emergency fund can help you address some small unforeseen expenditures.
Create a small emergency fund—$1,000 is a decent starting point. If you have that, set a target of creating a larger budget, such as $2,000.
Eventually, you’ll learn to save up to three to six months’ worth of living expenses.
To learn more about emergency funds, click here.
6. Increase Your Income
Increase your income by asking for a raise, getting a second job, or starting a business. The more money you bring in, the easier it will be to pay down debt.
Whether you find your current job less rewarding or perhaps you are hoping to improve prospects by undertaking a new career, looking at increasing your income will definitely add up to reducing and eliminating your debt.
There are a lot of side hustles out there that don’t require a great deal of education, and many of those jobs offer decent pay. Earn more money and divert it directly to paying down your debts.
Executive Summary on Debt Management in Canada
When deciding how to manage your debt, it’s important to go with the solution that fits your situation.
Debt management helps you pay off your debt at a rate that works for you and alleviates significant strain on your monthly budget.
Now you know that there are many options available to manage your debt effectively. In all of these, you will have to make some sacrifices in order to achieve financial freedom in the long run.
You may need to cut your expenses and get a second job to make more payments on your debt so as to be debt-free faster.
Whichever option you choose to manage your debt, you need to be honest to yourself, be open-minded, and accept counsel from others you regard as wise and trustworthy.
If you have any questions or contributions on debt management in Canada, kindly drop them in the comment section.