Debt Relief Experts
I talk with many people who are having trouble managing debt payments, and one option to getting out of debt we discuss is working with their bank. When can your bank help you with your debt? And most importantly, when does this make sense for you? I look at each service your bank may offer and outline some things you’ll want to consider to see if these solutions can help you get out of debt sooner.
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What debt help options can your bank provide?
Your bank’s goal is two-fold. First, they want to ensure that you don’t default on your current loans. After all, they want to be repaid. Second, the longer you owe them money, the more they make in interest. Keep this in mind when evaluating the potential solutions your banker may recommend.
To help you manage your debt, your banker may suggest any of the following options:
Bank account overdraft
If you don’t have a lot of debt, the bank might offer you an overdraft if you don’t already have one or increase the one you have. Overdraft protection can help if you periodically run short of funds but are otherwise on top of your debts.
Access to overdraft funding can be helpful if your income fluctuates from month-to-month. However, using an overdraft is not a good idea if you constantly miss payments or as a cushion for income loss. You will be required to pay a usage fee (either monthly or a charge for every time you go into overdraft), and you will pay ongoing interest on any overdraft balance. Interest rates are usually around 21%, not much different from a credit card’s interest rate.
Credit card balance transfer
Another thing the bank could do to help is to offer a balance transfer credit card. These cards may have a zero-interest rate for a specific period or may have a lower rate than your current credit card. The idea is you transfer your existing debt to the new credit card, and because you pay less interest, more of your monthly payment goes towards reducing your outstanding balance. As a result, you get out of debt sooner.
Access to zero, or low-interest credit cards, will depend on your credit score and amount of debt, and it’s only a good solution if you don’t owe a lot. Most balance transfer credit cards have time limits until they become regular credit cards with standard credit card rates. If you can pay off all or most of the balance before the grace period expires, using a balance transfer card to get out of debt can work. Otherwise, you are only getting temporary debt relief.
Getting a consolidation loan
One of the most common ways for banks to help you pay off your debt is to offer you a consolidation loan.
Consolidating your debts in one loan means that you borrow enough money to pay off all your existing debts and then owe money to a single lender, in this case, your bank. But while this sounds great if you’re struggling with debt, obtaining a consolidation loan is not that easy.
Some of the reasons people are refused a consolidation loan by their bank include the following:
- You have no security for a debt consolidation loan. Many banks ask for collateral when you apply for this type of loan, especially if you have difficulty managing the payments. If you don’t have anything to offer as collateral, you’re highly unlikely to get accepted.
- You have problems with your credit report. If late debt payments have hurt your credit score or you have any debts in collection, your bank might not be willing to offer you a consolidation loan.
- You have too much debt. Most banks in Canada allow you to borrow up to 40% of your gross annual income. If your debts exceed that percentage, you might not qualify or may only be able to be approved for a smaller loan that will not cover everything you owe to creditors.
Before asking your bank for a consolidation loan, you should run some numbers.
Start by preparing a simple monthly budget. You need to list your incoming cash flow and outgoing expenses, including any other debt payments like your rent, student loan, mortgage, or car loan. What’s left is how much you can afford to repay each month.
Next, list all your debts and which ones can be consolidated. You may not be able to transfer certain loans like a car loan or lease with another financial institution. Similarly, we do not recommend consolidating government student loans.
When evaluating whether a bank consolidation loan will help you get out of debt, ask yourself these questions:
- Will the amount the bank offers to consolidate deal with all my debt?
- Are my new monthly payments affordable? Will they fit my budget without using more debt?
- Will this solve my cash flow problem without relying on credit cards for emergencies?
- Is my income stable with a low risk of losing my job or falling ill?
- Am I willing to risk these assets if I’m offering collateral and can’t meet my monthly payments?
If your answers to any of these questions are no, then getting a bank consolidation loan to refinance your debts may not be the right solution to help you get out of debt.
Refinancing your mortgage
If you are a homeowner, you may consider talking with your bank about consolidating your debts into your mortgage. Refinancing your mortgage is only possible if you have enough equity in your home and have the income to support higher mortgage payments. Your current bank or mortgage lender can help you use your home equity to get out of debt in two ways:
- Replace your existing mortgage with a new larger mortgage.
- Add a second mortgage secured against your home value.
There are multiple factors that the bank will consider before approving you for a remortgage, including your credit score, the value of your home, and how much you want to borrow. As with all lending applications, your bank will ask you to substantiate your income, and they will follow any internal lending policies. Most banks won’t finance beyond 80% of your home’s net equity or if you have a debt-to-income ratio beyond 40%.
When deciding whether remortgaging to deal with debt is a good option for you, it’s important to consider:
- Is the interest rate on your new mortgage lower than the blended rate on all the debts (including your current mortgage) you are refinancing?
- Can I afford the monthly payments?
- What penalties will I have to pay to break my existing mortgage, and what other fees and legal costs will I have to pay?
- Will refinancing old debts into a larger mortgage improve my finances enough that I won’t need to use credit cards for day-to-day living costs?
Again, if you answered no, the risks of taking on a higher mortgage to consolidate debt through your bank, or any mortgage lender for that matter, might be too high.
Tips on how to ask your bank for debt help
I recommend talking with an advisor in person. You may not want to pick up the phone to call your bank and discuss your inability to pay their bills because you are embarrassed or upset. If you have an existing contact at your bank, begin there. If not, most banks have a page on their website where you can apply online, book a meeting, or get contact numbers.
Applying for a consolidation loan online may seem less stressful but dealing with debt is serious. Speaking with an expert about what kinds of solutions you need before applying is the way to go.
But before picking up the phone to discuss your options with your bank, here are some tips that will help you during the negotiation.
- Gather your information. Before calling, have some things at hand, including your account numbers, balances, your income, monthly spending, and details about the payments you make to others.
- Practice your story. Your bank will want some information about what has happened, why you can’t pay your bills or why you are asking for a consolidation loan. Whether it’s because you were ill or laid off, sum up the story in one or two sentences. Knowing what you will say ahead of time is helpful as this will keep you on track during what is sure to be a stressful meeting.
- Remain calm. It’s easy to lose your temper when talking about sensitive financial issues with your bank. Losing your cool will get you nowhere, so try to stay calm no matter the conversation’s outcome.
- Take notes. Write down the name of the person you’re talking to and take quick notes of everything discussed. This will help you feel in control of the situation and give you details to refer to if there’s ever a misunderstanding about what was discussed.
- Be prepared to provide more information. Your bank may ask for proof of income or ask for a home appraisal if you are refinancing through your mortgage. Working with your bank to restructure your debts won’t happen overnight and may take a few steps or stages.
- Ask to get it in writing. If you reach an agreement with your bank, ask to have their decision in writing. This way, you’ll be able to look at the terms and conditions and make your decision with a clear head. If they deny your application, ask (politely) the reasons why to give you something to work to correct if that’s possible.
Options when your bank refuses to help
Even though banks are generally sympathetic towards customers who fall on hard times and try to help them, there are situations where your bank will refuse to help. This may be because you owe too much money and don’t have any collateral or equity for a consolidation loan or remortgage, or simply because your credit profile does not meet their minimum lending standards.
If your bank refuses to help, you still have some options.
You can look to other lenders for help. Talking to private lenders with lower application requirements than traditional banks is a possible solution, but make sure the interest rate and other terms and conditions you are offered will help you get back on track. Unsecured consolidation loans and private mortgages usually have very high interest rates and late payment penalties. One example, and something to avoid, is high-cost installment loans for poor credit that carry interest rates of 29%, 39% and even up to 59%. These high-interest rate loans may seem to help because they lower your monthly or weekly payment, but in my experience, they often do nothing but push your debt problem down the road.
If you have a staggering amount of debt, your better solution is to talk with a Licensed Insolvency Trustee. LITs are trained and certified to help you explore all your debt reduction alternatives. Those options include repaying your debts in full through a debt management plan or, if you can’t afford to pay back all your debts, making a settlement offer to your creditors through a consumer proposal.
Most importantly, take your time to decide what’s best for you. If you are having trouble managing your debt payments, reach out to our team at Hoyes Michalos. We are happy to review your financial situation and help you develop a plan to become debt free.
