Overcome Debt Payment Concerns Through Debt Consolidation

Feeling alone when it comes to your debt management woes? Canada’s national debt is at an all-time high, reaching 1,455.8 USD bn in March 2022. Compared to the national debt in 2021 which was 1,314 USD bn, it’s not difficult to see how debt reduction and debt management is even a pressing concern for the Government!

One possible solution to better debt management is consolidation. Wondering what exactly debt consolidation entails, and if it is the right option for you? Then, let’s get into the details and examine the pros and cons of debt consolidation.

What is debt consolidation?

Debt consolidation means taking out a larger loan to repay your various debts such as smaller loans, lines of credit, and credit card payments. You can then focus on only paying back that one larger loan instead of managing different debt payments.

When should you consider debt consolidation?

There are many factors to consider when deciding if debt consolidation makes sense for you:

If you have too many different types of debt that need repayment

Let’s be honest, managing your finances can be tricky. If you have different types of debt such as a mortgage, a personal loan, a car loan, credit card bills, and lines of credit then you need to keep track of all the payments for each. If you miss making payments or make late payments for any loan or lines of credit, then you will most likely have to pay heavy penalties. It could also negatively affect your credit score or credit rating.

If you’re finding it hard to effectively track and make your debt repayments, then debt consolidation may be a good idea. This is because it makes for simpler borrowing by reducing the burden of tracking payments and will help you ensure you do not miss payments since there is only one single loan repayment that you need to worry about.

If you’re paying too much interest on your current debt

This is especially true for debt related to credit cards as credit card interest rates are significantly higher than interest rates on personal loans. If you’re only making minimum payments on your credit card every month, you bear the burden of the high interest charges on the outstanding amount.

It is also possible that you are paying higher amounts of interest on your other loans. For example, if you had a low credit score or credit rating in the past, it is possible that you had to take out a loan with a high interest rate. However, if you can get a balance transfer credit card or a loan at a lower interest rate, then it would make sense to consolidate your debt and save money by paying less as interest.

If your credit score has improved

As we’ve just covered in the example above, a debt consolidation loan makes sense if you can get a loan or a balance transfer credit card with a lower interest rate. What do you need to get a loan or credit card at an attractive interest rate? Having a high credit score or credit rating will go a long way in getting a loan or credit card with a lower interest rate. According to Equifax, a credit rating between 650 to 725 is quite a good credit score. If you have found that your credit score has improved since the last time you took on debt and falls within the ‘good-to-high’ range, then it may be time to consolidate your debt and take advantage of the lower interest rates your improved credit score can get you.

If you want to improve your credit score

It may also be a good idea to get a debt consolidation loan if you want to improve your credit score. You see, your credit score is calculated based on your credit repayment history. If you find that you are unable to repay your current debt in a timely manner, then it will negatively affect your credit score. If missed or late payments on your current debt becomes the norm, then your credit rating is sure to fall. In such a case, you may want to consider opting to consolidate your debt under one loan, and ensuring you make your payments in time so your credit score can improve. Of course, this may end up costing you as you would not get a great interest rate on your debt consolidation loan if your credit score is poor, but at least you will be able to set yourself up for availing better loans in the future.

If you want to reduce your credit usage

Your credit usage is the ratio of the amount of credit available to you and the amount of credit you have utilized (by taking on debt). For example, if your credit limit on a credit card is $5000 and you have used up $2500, then your credit usage would be 50%. The higher your credit usage, the less attractive you are to lenders. This means that a higher credit usage percentage would make it more difficult for you to get loans or enjoy low interest rates. 

A good rule of thumb when it comes to credit usage is to keep it below 30-35%. Keeping it below 10% is considered excellent. A debt consolidation loan would help you to bring your overall credit usage down. You should definitely consider one if your current credit usage is 30% or higher.

If you are unable to repay your current debt

The reason that debt instruments like loans, lines of credit, and credit cards exist is so that you can make payments or purchases that you are ordinarily unable to afford. So, if you find that you are not able to repay your current debts perhaps because the monthly payment amounts are too much, or that you simply don’t have the means to make the payments at this point in your life, you can opt for a debt consolidation loan. It will help you close all your debts and if the amount is large enough, you can use the loan amount to meet any critical expenses and even repay the same loan.

Now you may have understood when a debt consolidation loan or balance transfer would be the right option for you, but you also need to understand when it would be the wrong option for you.

What factors should you consider before opting for debt consolidation?

Debt closure penalties and consolidation fees: Many lenders charge you a fee or penalty when you opt for debt closure. So, be sure to check with every lender to see if they have a no-penalty policy or will levy a fee. This will prevent any nasty shocks of having to pay hefty fees or penalties when you’re actually trying to save money by consolidating your debt. If it is the same lender offering you a debt consolidation loan or a balance transfer credit card, you may be able to forego any penalties. So, ensure all your checks and discussions are in place before signing on the dotted line and taking out a debt consolidation loan or balance transfer credit card.

Longer repayment period: While debt consolidation can reduce your monthly payment amounts, reduce your credit usage, improve your credit score, and make for simpler borrowing, it can also mean that you may have to settle for a longer repayment period. This means that you may end up paying more in interest in the long run than on your short-term loans, and that you would not be debt-free for quite some time. Of course, as with anything in life, there are trade-offs to be made, but make sure that you take the longer repayment period into consideration.

Interested in taking out a debt consolidation loan or balance transfer credit card? We can help! Contact us today to talk to our debt specialists and financial experts and get your debt payments back on track.