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Should I Take Out a High Interest Loan to Pay Off My Debt?

I recently read a Google ad that said “Bankruptcy is expensive” apply for a loan with us.  The company ad went on to say in fine print with tiny font size, interest rate is 34.99%.

This got me thinking. Let’s explore two courses of action with examples:

Sally, who has $12,500 in debt and absolutely does not want to file a Bankruptcy. She decides to borrow $12,500 at 34.99%. She decides to borrow the money over a 5 year period or 60 months. Her payments are $425.25 per month. In 60 months, she will pay $12,500 in principal and a whopping $13,015 in interest payments. In total Sally will pay a total of $25,515.06.

Her friend Molly owes $12,500 and decides she also does NOT want to file a Bankruptcy.  She does some research and hears about Consumer Proposals.  

A Consumer Proposal is a federally regulated program under the Bankruptcy and Insolvency Act that is legally binding on you and your creditors. It is administered by a Licensed Insolvency Trustee (LIT). When a Consumer Proposal is filed, you get an immediate stay of proceedings. What does that mean in English? It means all creditors’ actions must stop. They can’t call you nor can they garnish your wages. If a garnishment has taken place, we stop the garnishment so you can receive your full pay cheque.  All interest stops. You stop making payments to your unsecured creditors and make one payment a month to your LIT.  

Molly decides to file a Consumer Proposal and she offers her creditors a total of $12,500 over 60 months. A Consumer Proposal is, in a way, like an interest free loan. So, in Molly’s case, her Consumer Proposal payments are $208.33 each month for 60 months. In 60 months, she will pay $12,500 in principal and ZERO in interest.  

By comparison to Sally’s situation, Molly is saving $216.92 each month – so let’s round that up to $217.00. Molly decides to take the $217 per month that she is saving compared to Sally and invests that extra money over the next 5 years. Molly pays $208.33 each month in her Consumer Proposal but then sets aside $217 each month into a savings plan where she receives 5% interest. Molly is paying a total of $425.33 each month with her plan and Sally is paying $425.25 each month on her loan.

Final result

Sally will be debt free in 60 months with payments of $425.25 per month and paid a total of $25,515.06 to get herself debt free.  At the end of her loan, she has no savings. 

Molly, who took a different course of action, is also debt free in 60 months. She paid a total of $425.33 a month for 60 months for a total of $25,519.80. At the end of Molly’s experience, she is debt free through the payments in her Consumer Proposal, but she invested $217 each month at 5% interest, and she now has $15,098 in her bank account.    

In the writer’s opinion, it is never a good idea to borrow money at a high interest rate to get out of debt.  

Call Allan Marshall and Associates Inc to speak to one of our highly trained professionals, who can guide you to become debt free.  

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Glenn Steiner

Glenn Steiner is a Licensed Insolvency Trustee with Allan Marshall & Associates Inc. He has over 23 years as an LIT and 15 years in senior positions with the Office of the Superintendent of Bankruptcy.