Find a Smarter Way Out of Debt That Minimizes Costs

Borrowing money isn’t cheap, and in recent years, it’s become a lot more expensive. Prime interest rates are still high in 2024, and the impacts can be felt across the board. Prime interest rates don’t just impact mortgages. They can also affect a number of consumer debts like lines of credit, student loans, and low-interest credit cards that charge prime plus a certain percentage.

Smart money management is all about finding the most financially effective way to do something. If you’re dealing with overwhelming debt, you might be facing multiple years of steep interest charges and slowly paying down the principal. In some cases, you may not even be able to keep up with payments.

When you’re evaluating your debt relief options, it helps to understand the costs and benefits of commonly used tools like consumer proposals, debt consolidation loans, and debt settlement plans.

Consumer Proposals: Pros

The consumer proposal process is only available to people who are insolvent and can’t keep up with their payments, but it is one of the more effective ways to get out of debt. A consumer proposal can reduce the principal of your debts significantly and stop interest charges and collection actions taken against you.

A consumer proposal can result in significant savings on overwhelming debt and get you out of debt much faster than alternatives.

Consumer Proposals: Costs

There are two primary costs to a consumer proposal. The first is that you have to make monthly payments to pay off the remainder of your debt. This is a major cost saving, but you do need a regular income to make these payments. The second is the impact on your credit score, which remains on your credit history for the duration of the proposal’s terms plus three years.

Debt Consolidation Loans: Pros

A debt consolidation loan rolls all of your unsecured debts into a single loan at a lower interest rate. The cost savings depend on entirely on the interest rates of the debt you consolidate and the rate on your new loan.

Debt Consolidation Loans: Costs

A debt consolidation loan does not reduce the principal that you owe. You will still have to contend with these costs.

In addition, some ways of consolidating debt, such as balance transfer cards, only offer a reduced interest rate for a limited period of time, usually one-to-two years.

Debt Settlement Plan: Pros

With a debt settlement plan, you offer your creditors a lump sum payment in exchange for having the rest of your debt forgiven. Debt settlement plans can save you a lot of money by reducing the principal amount that you pay and saving you all of the future interest charges that you avoid by eliminating your debt right away.

Debt Settlement Plan: Costs

The costs of a debt settlement plan can become tricky. Agencies that negotiate debt settlements charge a fee, but there are other considerations as well. If you have the money, making a lump sum payment can quickly save you a lot on your debts. If you don’t have the money, debt settlement firms may suggest that you suspend your payments in order to accumulate a lump sum. This is not always advisable, as your creditors can take collection actions against you.

The smartest way out of debt depends on unique factors in your situation. Make sure you talk to a Licensed Insolvency Trustee about the best path for you.