As part of his job, Guillaume, 38, worked overtime which allowed him to earn $5,000 to $7,000 annually, in addition to his income of $80,000. But his employer turned off the tap…
“For years, since I worked a lot of overtime, I systematically included this additional amount in my income and adjusted my expenses accordingly,” explains Guillaume.
This is unfortunately a common mistake, because by considering overtime as a guaranteed income, we can tend to increase our expenses and be dependent on extended hours which, ultimately, end up harming our health.
Less serious than he thought
Now that he can no longer count on these few thousand dollars more in his income, Guillaume used his credit cards to make up for the shortfall. In total, he accumulated a balance of $15,000 on his cards and $8,000 on his line of credit. He also has to repay a car loan and a student loan every month for a total of $52,000.
By adding up the minimum payments of all his debts, he must pay $1,725 per month and his debt ratio has increased to 41%. However, his score in his credit report remains good, with 790 points. “People struggling with financial problems often tend to withdraw into themselves. However, it would be in their interest to inform themselves instead of letting the situation deteriorate or considering the worst scenarios,” remarks Pierre Fortin, president of Jean Fortin et Associés.
For his part, Guillaume spent four months seeing himself on the verge of bankruptcy, when in reality there were still other alternatives. “Cases where bankruptcy is the only option are rare. By reducing certain debts and rearranging the budget, this is sometimes enough to get things back on track. Debt consolidation can also be a solution, and when credit is too damaged or the amount of debt is too high, we can consider the consumer proposal,” indicates Pierre Fortin.
If the person’s financial capabilities are very limited, their income is low or the debts are extremely high, then bankruptcy is inevitable.
Take back control in three steps
How to regain control of the situation? First step, calculate your debt ratio. This tool helps you find out where you are on the debt scale by taking into account your income, housing costs and monthly payments on your personal debts. Be aware that a ratio of 40% or more is a red flag.
Second step, check your credit report. The score measures the strength of your file and determines whether a financial institution would grant you a loan and at what rate it would be granted. A score below 700 constitutes an alarm signal. Third step, make a budget or review the one you already have.
The solution: the consolidation loan
For Guillaume, it was possible to obtain a consolidation loan at the rate of $345 per month over 60 months. This allows him to consolidate his credit card debts, repay within a prescribed period, but also reduce the interest rate. In his case, this represents a saving of $330 per month compared to what he had to pay for his credit cards. “This type of loan has a higher rate than a regular loan and you should expect to pay between 12% and 15% interest. This is why debts with a rate lower than that of the consolidation loan should not be included in a consolidation,” indicates Pierre Fortin.
Guillaume will pay $5,700 in interest charges on his loan. That’s a lot, but less than the $8,700 he would have to pay by making only the minimum payment on his credit cards!
“At any time after the first six months, he could also repay his loan early. We therefore advised him to increase his monthly payments as soon as he works overtime again. By paying $135 more per month, he will have repaid it in three and a half years instead of five, and at the same time will have saved $1,700 in interest,” mentions Pierre Fortin. A great saving and he will also be able to sleep soundly again.
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