Debt Consolidation Loans in Toronto – Dangers

In the Greater Toronto Area, there is a growing trend for people to use the equity in their homes to pay off their consumer debts – frequently in the form of a secured Debt Consolidation Loan.

A Debt Consolidation Loan is the combining of outstanding unsecured debts (ie credit cards) into one monthly payment. Often, this type of loan is secured against the borrower’s equity in their home.

Consolidated loans can be appealing, as they offer lower interest rates than the debts being consolidated, and usually result in much lower monthly payments. According to the Canadian Association of Accredited Mortgage Professionals*, in the 12 month period prior to November 2010, approximately 5.4% of Canadian home owners with mortgages, took out Debt Consolidation Loans against the equity in their homes.

Dangers

We do not dispute that there can be good reasons for using home equity in this manner. However, it is important to understand the possible dangers of home equity secured Debt Consolidation Loans:

• Reinforces the idea that one can borrow their way out of debt.


• Temporarily hides the consequences of out-of-control spending.


• Changes unsecured consumer debt in to secured debt.


• Puts people at risk of losing their homes over what started out as simple consumer debt.

An alarming situation that we frequently see is homeowners taking out two or more Debt Consolidation Loans against their home equity – spiralling further and further into debt and putting their home ownership and financial well-being at risk.

For those who end up in financial crisis and are seeking help – secured debt (such as Debt Consolidation Loans secured against home equity) cannot be part of a Consumer Proposal. In a Consumer Proposal, a Trustee can only negotiate with creditors to reduce the amount to be paid on unsecured debt (ie: credit cards, payday loans, etc).

We strongly recommend that if you are considering a Debt Consolidation Loan that you speak with a Bankruptcy Trustee first. If you live in the Greater Toronto Area, we offer a free initial consultation, where we will review your current financial situation and explain all of your options to you.

*According to the Canadian Association of Accredited Mortgage Professionals’ (CAAMP) – November 2010 Annual State of the Residential Mortgage Market* - during the 12 month period prior to the report, 18% of home owners with mortgages took equity out of their home. 30% of those home equity loans are estimated to be for debt consolidation (30% of 18% = 5.4%).