06 May Debt Counselling Versus Debt Consolidation — Let’s Explain

Have you ever heard of debt counselling, or perhaps a consolidation loan? A lot of people get confused between these two concepts, so it’s important to discuss them so you can make an important decision on how you’ll refinance your debt. In short, the key differences are that:

• Debt counselling is a legal process wherein a counsellor negotiates your debts to be reduced or for lower interest rates. It is not a loan. You still make one payment each month, but the payment is redistributed among your lenders.
• A consolidation loan is a loan you take out to pay all your debts at once so you’re left with a simplified, simple payment. It is not a legal process.

This blog thoroughly details the differences and similarities between the processes and how they affect your finances. Let’s dive in!

Debt Counselling

Debt counselling, synonymous with debt review, is a legal process that consolidates all your debts into a single, monthly payment. You’ll collaborate with a debt counsellor to make a budget fitting for your financial circumstances. During this process, your counsellor will negotiate with your respective lenders for lower interest rates and potentially reduced payments. This saves you money in the long run.

Typically, the process takes 3-5 years, depending on how quickly you pay off your debts. The court puts you under debt review status, disabling you from taking out additional credit. Then, they consolidate your payments into one monthly transfer, which is then distributed among your lenders by a distribution agency. When you’ve fully paid up, you get a clearance certificate that you can submit to credit bureaus so you can get the debt review flag removed.

You’ll then be able to take out new credit and live financially free.

Example

Lydia has taken out multiple loans: an auto loan, a mortgage, and numerous store and revolving credit cards. Soon enough, she finds herself unable to make her minimum payments and afford living expenses. She is overindebted. She gets in touch with Debt Refinance and is assigned a debt counsellor, with whom she collaborates to make a budget and financially educate herself. 

The court declares her overindebted, and creditors may no longer harass her or take legal action against her. She is ordered to make one payment each month to a redistribution agency, which distributes her payments among lenders. Her debt counsellor has negotiated on her behalf for reduced interest rates and payments, which makes payments affordable. 

She slowly builds an emergency fund and savings while under debt review, as per her counsellor’s advice. Lydia can now afford her payments and living expenses and can sleep peacefully at night. After 3 months, she gets a raise and can pay more debt. Within 3 months, she is fully paid up and gets her clearance certificate. 

Then, she submits evidence of her repayments to the ITC, and her credit record is clean. She slowly rebuilds her credit, and soon enough buys a car. 

Consolidation loan

A consolidation loan is a personal loan one takes out to consolidate all their debt payments into one easy, monthly payment. You’d pay off all your debt with that loan, and then make consolidation loan payments to the bank or institution with whom you lent money from.

Example

Joshua has too many payments to make and sometimes forgets to pay his credit card. He has over-diversified his lines of credit and is making minimum payments. One of his friends advises him to take out a consolidation loan and recommends Debt Refinance, which lent him money to consolidate his finances. Joshua approaches us and explains his situation. We are glad to help and lend him enough money to cover his various debts. After that, he makes monthly payments to one institution– us. After a while, he has fully paid off his debt, and his credit score skyrockets. 

Debt counselling vs. consolidation loan

These are the key differences between the two processes.

• Debt review is a legal process that spans over 3-5 years.
• Consolidation loans are loans that consolidate all your debt repayments into one payment by allowing you to pay them all of at once.

Now that you are informed on what the differences between debt counselling and debt counselling are, you are empowered to make financial decisions about what is best for your circumstances. Take action today: contact Debt Refinance to start your journey to renewed financial health.