What Is Debt Consolidation?

Ever feel like you are drowning in a sea of bills, payment dates, and interest rates? Juggling multiple credit cards, loans, and random monthly payments can quickly turn into a very stressful situation, making your debt too much to handle. If you are nodding your head right now, then you may be looking for debt help in Canada and one of the options that will pop up is debt consolidation.

What Exactly Is Debt Consolidation?

Debt consolidation involves taking out a loan through a lender to pay off all your debts, including existing loans or credit cards. It essentially combines multiple debts into a single, larger loan, or it rolls all your debts into one monthly payment to manage. This is an option that many people consider especially when they are trying to get out of debt on a low income because of how convenient they sound.

We will go into the details of debt consolidation and why it may or may not be a good choice for you. Spoiler alert–there are better debt-relief solutions out there that will actually reduce your debt! We recommend you speak with a debt expert to learn all your options so that you can make a sound decision that is best for your financial situation.

Types of Debt Consolidation

There are different ways you can consolidate your debt. We will cover a few ways you can potentially combine all your debts into one:

Debt Consolidation Loans

You can get a debt consolidation loan through banks, credit unions, or other lenders to combine all your loans into one. The lender will roll your existing debt into monthly payments at a fixed interest rate with fixed payments. You will then only turn to this one lender going forward instead of multiple ones at once.

Personal Loans

Another option is getting out a larger loan yourself and using that to pay off all your smaller loans. Once you pay off all the smaller loans, you will then only have one payment to deal with.

Balance Transfer Credit Cards

If most of your debt comes from credit card balances, a possible option is a balance transfer credit card. This is exactly what it sounds like–you transfer the balance of one account to another, typically with a lower interest rate. With this option, you have to be aware of the limited-time low-interest offers and ensure that you can pay off your balance within the given window.

Home Equity Loans

For homeowners, a home equity loan is an option. You are borrowing against your home’s value to consolidate your debt at a lower interest rate. While it sounds appealing, it comes with a big caution: your home is on the line. If you miss payments, you could be risking your house—so this option should only be considered if you are confident you can stay on top of things.

Why Would You Want to Consolidate Your Debt?

There are a few reasons why someone may consider consolidating their debt, but keep this in mind… a lot of it may sound too good to be true, or there are better debt-relief options out there that can offer similar benefits.

You will often hear that there are lower interest rates and simplified payments, which all sound very appealing, especially when you are overwhelmed with debt. However convenient these loans sound, they are not for everyone and can be hard to qualify for–especially if your credit has already been damaged.

As for the monthly, simplified payments? Debt consolidation is not the only debt-relief solution that offers this.

Should you consider debt consolidation?

Consolidating your debt will not make it disappear, but it could give you a clearer way to pay it off. You may be considering it if you are dealing with high-interest credit card debt that has become too hard to manage. Or maybe you are tired of keeping up with multiple payments to different creditors and you are looking for a simplified way to pay it off more efficiently.

It all sounds great, but let’s talk about your other options.

Debt consolidation usually involves higher interest rates (reaching nearly 60% in Canada) and can lead to greater financial strain in the long run. The interest rate and additional fees can increase your overall debt, leaving your original debt unpaid. Falling into a debt trap is the last thing you need if you are already struggling with debt.

The Debt Consolidation Process

Debt consolidation usually involves applying for a loan from one lender to pay off many debts from multiple lenders. The steps are usually as follows (in a perfect scenario):

• Review your budget: You have to see how much you can comfortably afford each month to make the payment and avoid creating new debt problems.
• Complete the application: Then you will complete the lender’s loan application. You should avoid the ones that require multiple credit inquiries as that can reduce your credit score even more.
• Pay off existing debt: Use the consolidation loan to pay off your existing debt and close old accounts to prevent running up balances again.
• Make monthly payments: Start paying off the consolidation loan quickly to reduce interest charges and improve your credit score.
• Pay off that loan: Once the loan is paid off, you will want written confirmation and to check your credit reports for accuracy.

Common Pitfalls to Avoid

If you are considering debt consolidation, these are common mistakes to avoid:

• Racking Up More Debt: Once your old debts are paid off, it might be tempting to start using your credit cards again. Resist the urge! Adding new debt will undo all the progress you have made.
• Not Reading the Fine Print: Make sure you understand the full terms of your new loan or balance transfer card. Some loans come with hidden fees or higher interest rates after an introductory period.
• Not Changing Your Spending Habits: Debt consolidation will not solve your problems if you do not make changes to how you manage money. Stick to a budget and focus on paying down your debt as quickly as possible.

Alternatives to Debt Consolidation

Debt consolidation is not your only option. In a perfect case scenario, it could work for you but often it will not be the best option if you are already struggling with debt and under a lot of financial stress.

It is important to speak with a Licensed Insolvency Trustee to understand what options are available to you and is best for your financial situation. They are authorized by the government to manage debt solutions and help people facing financial difficulties find ways to get out of debt–unlike the other lenders providing debt consolidation loans who are not regulated.

Licensed Insolvency Trustees are there to navigate debt-related issues, understand your financial situation, and offer solutions, like a consumer proposal, which can reduce your debt by up to 80%. They are there to help take the stress off your shoulders by speaking to creditors on your behalf to stop collection calls and legal actions, protecting you from your creditors.

How Farber Can Help

If you are feeling overwhelmed by debt and unsure which path to take, Farber is here to help. We do not provide loans, but we do help you with solutions to consolidate the debt you have.

Our team of experts can guide you every step of the way. We offer personalized advice and practical solutions, tailored to help you simplify your debt and regain control of your finances. During your consultation, we will help you review your financial situation, explore your options, and create a plan to get you back on track.

Take the first step toward building a healthier relationship with money by booking your free consultation with Farber today!