When is it Time to Consolidate Debt?

With the holidays just behind us, the new year has many of us reviewing our budget and making commitments to improve our spending habits. While it isn’t uncommon to have spent a bit beyond your means during the holiday season, managing your debt in a timely manner is critical to your financial health. For those who are feeling overwhelmed by the idea of repayment, or if it simply seems out of reach, you may want to consider consolidating your debt.

What is debt consolidation?

Debt consolidation is the process of acquiring a new loan or credit card to pay off multiple debts under one loan. This also means you will only have to make one monthly payment instead of paying each debt individually.

Is consolidation right for me?

Debt consolidation can be a useful tactic for those who have multiple sources of debt, adding up to a large sum, particularly if one or more of those sources has a high interest rate. You may not want to consider this option if you only have one or two sources of debt and/or the total can be paid in under a year. While there are several factors that come into play, you may benefit from restructured debt if:

• The interest you owe on your high interest products is outpacing your payments. For example, you're only able to make the minimum $50 monthly payment on your credit card but are accruing hundreds of dollars a month in interest.

• The interest rate on the debt you are carrying is high and can be lowered. For example, you’re carrying a $5,000 balance on a credit card with a 19.99% interest rate, while your financial institution has a debt consolidation option with a 12.5% interest rate.

• You are having trouble with payment organization. Perhaps you have multiple credit cards with balances and several small loans, all of which come due at different times of the month and for different amounts, which is making it hard for you to keep track and leading to missed payments. A consolidation loan reorganizes your debt into one payment so that you have fewer payments to remember.

• Your monthly loan payment would be less costly than the payments you are making across multiple debts. Let’s say you have five credit cards, each with a minimum payment of $100 per month, and you are barely keeping pace with interest accrual and not effectively paying down any of the debt. The single monthly payment of a consolidation loan may be less than your previous total, creating cash flow in your budget and allowing you to pay off the debt in a more structured and affordable manner.

What kind of debts can be consolidated?

Typically, credit card debt, student loan debt, medical debt and high-interest personal loan debt are eligible for consolidation. However, this varies case by case and will ultimately be decided by the financial institution you choose to work with.

Where can I find help?

Speaking with an expert is a great first step. Book a meeting with one of our financial advisors to explore your options and discuss what a consolidation loan would look like for you. You’ll want to come prepared with proof of income and the most recent statements related to any of the products you wish to consolidate.

Future finances

If you choose to access a consolidation loan, it is important that you manage your spending and avoid taking on more debt while you are paying the loan.

Do you need help with budgeting? Access our Money Matters: Budgeting resources.

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