A valuable lesson of caution for a reconstituted family

Derek and Macha have been in a relationship for 2 years. With 2 children each from previous marriages, they decided to live together and buy a large family home. It was a beautiful project that almost turned into a nightmare.

In July, they embarked on this great adventure. Derek’s lease was ending on June 30th, and Macha sold her condo. They moved in together, believing that despite the higher cost of the house, it would still be cheaper than living separately. Since they both owned a car, they also agreed to sell them and purchase a 7-seater van. Everything seemed to be going well for the blended family, but life sometimes has surprises in store…

Underestimated expenses

July was a tough month for their finances. «As often happens, the couple underestimated the expenses associated with buying a home. They didn’t factor in the costs of moving, land transfer taxes, notary fees, unexpected minor repairs, furniture and curtain purchases, and more. The list is long, and if you don’t have some money saved to cover them, you have to resort to credit, as Macha and Derek did», explains Pierre Fortin, a licensed insolvency trustee and president of Jean Fortin et Associés.

When they received their credit card bills at the end of August, totaling $18,000 plus an $8,000 credit line, they were overwhelmed. In addition to that, they had a $320,000 mortgage. With the additional expenses related to the back-to-school season for their 4 children, they lost control of their finances. Wanting to avoid a disaster at all costs, they quickly consulted an insolvency expert.

Debt consolidation

The combined minimum monthly payments for their credit cards, credit line, mortgage, and auto loan amount to over $2,950. This was too heavy a burden for the household, considering their total gross annual income of $127,000. «Furthermore, a large portion of their consumer debt was incurred on credit cards with an average interest rate of 17%. In these conditions, if they only make minimum payments, it would take them 22 years and $16,000 in interest fees. The same debt on a credit line with an 8.5% interest rate would have been easier to manage,» says Pierre Fortin.

While preparing Derek and Macha’s budget, the trustee found that they could allocate $700 per month for a repayment plan. The most suitable solution for them is a consolidation loan, which will allow them to pay off their credit card debts at once and make a single monthly payment at a lower interest rate.

Are they eligible for consolidation?

What factors do financial institutions consider when granting such a loan? «They first use the debt-to-income ratio to determine if the weight of the debts and housing allows for an additional loan. The couple’s ratio was 34% before refinancing and 31% after the desired consolidation loan, which is within an acceptable limit,» points out Pierre Fortin, while noting that this calculation does not take into account the number of dependent children, which reduces the couple’s maneuvering room.

The bank will also check their credit status. Since Derek and Macha have never missed any payments, their credit history is still impeccable. Their employment stability is another element that will work in their favor.

They ultimately obtained a loan to consolidate their credit card debts. The amount owed on the credit line was excluded since the applicable interest rate was lower than that of the consolidation loan, which is 13% and therefore more advantageous. They will have to make payments of $410 for 60 months to repay the loan, instead of the minimum amounts of $540.

However, they must absolutely avoid accumulating new balances on their credit cards. «If it is possible to consolidate your debts once, you cannot do it again within 5 years», warns Pierre Fortin.

 

Their financial situation

	Gross annual income	Debts	Monthly payments
Macha’s salary	$62,000
Derek’s salary	$65,000
Credit cards		$18,000	$540
Credit line		$8,000	$60
Auto loan		$36,000	$550
Mortgage		$320,000	$1806*

*Including municipal and school taxes