Third-party lenders often market high-interest debt consolidation loan like installment loans as easy money. However, what they don’t tell you is that this “easy money” is hard to pay back and can result in a debt spiral that is even harder to get out of.
Many people perceive high-interest debt consolidation loan as a quick, cheaper alternative to government-regulated, debt relief programs like consumer proposals or bankruptcy. In reality, these loans end up costing people far more than what they currently owe.
While the concept of getting a high-interest consolidation loan to pay off debt quickly may seem like a good idea, it’s a short-term band-aid solution with long-term adverse effects. After all, there is a lot that third-party lenders won’t tell you.
Debt Relief with David Sklar & Associates
The Licensed Insolvency Trustees (LIT’s) at David Sklar & Associates are regulated by the government of Canada and do not work on commission like some of the third-party lenders do. Our staff is committed to helping you choose the best debt relief solution for your situation. Not all debt solutions lead towards a positive outcome. Some debt solutions can lead you further into debt and desperation. From our perspective, providing high-interest loans to people already struggling with debt is similar to handing someone a 50-pound weight who is already drowning.
Some interest rates on these consolidation loans can reach almost 35% — the maximum amount of interest a lender is allowed to charge in Canada, without being considered criminal.
When reviewing all of the debt solution options available to you, we encourage you to consider how opting for a reliable government regulated, legally binding debt relief program like a consumer proposal can better set you up for future financial independence. Remember, easy money usually comes with strings attached.
What Are Debt Consolidation Loans?
A debt consolidation loan is a debt solution where an individual takes out one loan to pay off the many creditors they currently have, resulting in a single payment made each month to the loan company.
Debt consolidation loans are an attractive solution to people in debt because it’s a quick fix to end collection calls, eliminate the need to pay multiple creditors every month, and some lenders do not usually require credit checks, as a bank would. These may seem like benefits in the short-term but there can be long-term implications.
Simply consolidating your debts with a loan may not be the right solution for you. If the combined interest rate on your loan is higher than what you are currently paying to your individual creditors, then you might find yourself in more debt than you started with. In many cases, people find they have actually increased their payments not decreased them by choosing to take on a consolidation loan.
Examples of High-Interest Loans:
The average interest rate on credit cards in Canada is 19%. The Canadian Government law is that Lenders are not legally permitted to charge interest rates that exceed 35%. There are various types of non-bank loans, all of which have high-interest rates:
● Payday loans *
● Installment loans
● Car title loans
● Rent-to-own products
*Payday loans are exempt from the 35% interest rate limitation, therefore the annual interest rate on a payday loan is close to 365% or higher if you miss payments.
Examples of How Much a Consolidation Loan Can Cost You Over 6 Years:
| Amount Borrowed | Monthly Payment | Interest rate | Total Cost Over 6 Years (72 months) | Total Interest |
|---|---|---|---|---|
| $20,000 | $835.33 | 46.96% | $60,143.93 | $40,143.93 |
| $30,000 | $1253 | 46.96% | $90,215.89 | $60,215.89 |
| $40,000 | $1670.66 | 46.96% | $120,287.52 | $80,287.85 |
*Interest rates can fluctuate based on the lender.
What High-Interest Loans Promise VS. What They Provide
Providers offering high-interest debt consolidation loan like installment loans promise to absolve you of your debt fast, but at what cost?
According to the Canadian credit union TransUnion, installment loan debt is growing faster than any other debt type in Canada.
Before considering a high-interest loan like a payday loan or installment loan, consider the truth and implications behind these providers’ misleading promises.
What They Promise | The Truth |
|---|---|
| “Get your money today.” | You may get your funds the day you apply for a debt consolidation loan, but not without consequences such as extremely high-interest rates that can lock you into terms anywhere between 6 – 10 years. Should you choose to pay down your loan sooner, you will be penalized and forced to pay even more. |
| “Get approval withoutsubmitting your credit history.” | Consider the reasons why these lenders are willing to lend you money without seeing your credit history. After all, your credit history is meant to help indicate to lenders your ability to pay back a loan. These lenders don’t care how long it takes you to pay back these loans. The longer it takes you to pay back your loan, the more interest they can charge, and the more money they can make. Good or bad credit is irrelevant to these lenders because all they want to do is lock you into a contract as quickly as possible. |
| “Get a loan withoutimpacting your credit score.” | Consolidation loan companies may claim receiving a loan from them will not affect your credit score or in some situations even improve your credit score, but that’s not true. If you miss even one payment on your debt consolidation loan, it may be reported and it will impact your credit score. When you file for a consumer proposal in Toronto or a bankruptcy, it will appear on you your credit history. That said, it will be removed from your report in time, giving you a blank slate to restore your credit rating. |
| “You can pay off your loansand get back on your feet.” | The high-interest rates associated with these loans can lock you into payments that range from 6-10 years and require you to pay back your loan in full, plus interest. A debt consolidation loan may also contain penalties for paying down the loan faster than originally agreed upon in your contract. If you choose a Consumer proposal as your debt solutions, not only can you benefit from a significant reduction in the total amount of debt owed (interest-free), you are also able to pay off your proposal at any time without any penalties. The interest charges on a consolidation loan can often be more than what your original debt was, to begin with. A consumer proposal protects your assets, eliminates your interest and allows you to get back on your feet with the support of a licensed insolvency trustee. |
| “A loan will be cheaper than Bankruptcies & Consumer Proposals” | Working with a licensed insolvency trustee to file a consumer proposal or bankruptcy does have fees, but the total amount of debt you need to pay back is usually considerably less! A Trustee will spend time with you to review your finances, for FREE and will determine if you qualify for debt reduction. If you do qualify, the trustee will submit an offer to your creditors which can reduce your debts up to 80%. A debt consolidation loan requires you to pay back the full amount of your debts, plus the incredibly high-interest rates they can charge you on top of what you already owe. The fees associated to consumer proposal and bankruptcy services go towards all the administration work, document mailing, and time your licenced insolvency trustee spends to help you. On the other hand, debt consolidation loan lenders charge interest rates that directly profit them and they have no concern if their loan will actually cost you more to pay back in the end. They have no concern for your well-being or if this debt solution will actually help you out of debt. |
| “Interest-Free.” | If a debt consolidation loan provider promises you a loan with no interest, read the fine print. Typically, a “no interest’ loan will only apply to a specific time period and will not cover the entirety of the interest associated with your loans. No third-party loan is going to come interest-free. |
Debt Consolidation Loans VS. Consumer Proposals
A Consumer Proposal is an agreement between a debtor and their creditor that allows the debtor to repay a portion of their debts to avoid filing for bankruptcy. The contract is legally binding and agreed upon by both parties. The Bankruptcy and Insolvency Act states that only a Licensed Insolvency Trustee can file consumer proposals.
Since consumer proposals are considered a better alternative to bankruptcy for eligible individuals, high-interest loan lenders will often try to sway debtors from this option. Consider the misleading facts these providers may share about consumer proposals and the reality behind these statements:
What They Promise | The Truth |
|---|---|
| “A consumer proposal can take up to 5 years to complete.” | Don’t be misled about how long it will take to file a consumer proposal and complete it. Consumer proposals are repaid with monthly payments that can span anywhere between one to five years, five years being the maximum. There are no laws or penalties that say you can’t repay your consumer proposal in less time or with a lump sum payment. |
| “Your consumer proposal offer may not be accepted by creditors.” | It’s true — your creditors may not accept your consumer proposal offer. What these lenders won’t tell you, however, is the rejection rate is very low and that you can resubmit or amend your consumer proposal for approval if your creditors decline the initial offer. |
| “If you default on any payments, your creditors will continue with collection calls or legal proceedings.” | If you miss three proposal payments (not necessarily consecutive), the consumer proposal will be cancelled. That said, you will still be able to protect yourself from collection activities or legal proceedings. If you default on your consumer proposal payments, you can work with your Licensed Insolvency Trustee to propose a change to your proposal or if you have no other way of paying off your debt you can consider filing for bankruptcy. |
Debt Consolidation Loans VS. Bankruptcy
Bankruptcy may not be your only debt relief option, but it is an effective last resort when necessary. It is essential to know the truth behind the misleading claims that a high-interest loan lender will make about bankruptcies:
What They Promise | The Truth |
|---|---|
| “Filing for bankruptcy will ruin your credit score and credit history forever.” | When you file for bankruptcy, your credit rating will fall to an R9. That said, failing to pay back your debts will also impact your credit score significantly. It is important to understand that, even though bankruptcy will impact your credit score and go on your credit report, it will be removed six years after you get discharged. |
| “You will have to give up all of your assets. “ | There are assets you will have to give up in a bankruptcy, but there are also assets that you are entitled to keep. Assets exempted in bankruptcies are any personal items, furniture or household goods, tools essential to your work, and one car with a value of $6,600 or less. Additionally, in a bankruptcy, you will be able to keep a majority of pension plans, life insurance policies, and some RRSPs. If you file for a consumer proposal, your assets are all protected. |
