The impact of consolidating your debt

If you’re like most Canadians, then you most likely have debt from multiple sources. These could be some combination of auto loans, credit cards, student debt, lines of credit, installment plans on retail purchases via “buy now pay later”, and the list goes on. While the total amount of your debt matters far more than the number of loans you have, having a high number of recurring payments to keep up with can be a lot.

Debt consolidation: the basics

Almost all financial institutions offer options for debt consolidation. Debt consolidation is a means of rolling up multiple debts into a single, overall loan from your bank or financial institution. Essentially, the financial institution provides you with the money needed to pay off your various creditors, and you are left to repay the financial institution.

It’s one of the most frequently used debt management solutions — individuals, companies, and governments alike have benefitted from debt consolidation, even in cases where their debt is not at extreme levels.

There are several different types of debt consolidation, but the goal of each is more or less the same: establishing a loan with a single, consistent monthly payment, usually at an interest rate lower than the rates you’ve been facing through your previous debts.

While this may sound like a happy ending, it’s not always the best choice for all circumstances. Debt consolidation loans can yield many positive outcomes but, as with all types of loans, carry risks or conditions.

Life after debt consolidation

So, what happens after you consolidate your debt? What are the impacts on your short-term and long-term financial health?

If debt consolidation is the right fit for your situation, and you approach it thoughtfully, the positive outcomes should strongly outweigh the negatives.

Let’s start with the cautionary tales.

• Debt consolidation can have a negative impact on your credit score in the short term, as it will force the lender to do a credit check.
• In most cases, getting a debt consolidation loan will require a co-signer. For some applicants this is no issue, for others finding the right person can be tricky.
• Depending on the type of loan you get, there can be a fee to pay up front, such as in the case of a Balance Transfer. Other types will need to be backed by collateral, like a Debt Consolidation Mortgage.

But the positive outcomes can be strong too. Consider the following.

• Your payment amount and interest will in many cases be lower than they were before. As long as your new monthly payment fits in your budget, you’ll probably have a better chance to meet your financial goals.
• Debt consolidation can give you the opportunity to build back a stronger credit score, even if your score takes a small hit at the beginning (as mentioned above).
• There are non-financial benefits as well. Keeping up with multiple debt streams can be stressful and detrimental to your mental health, whereas a single payment that is consistent and manageable can feel liberating. It’s hard to put a price tag on peace of mind.

A candid conversation with your financial institution can help you determine if debt consolidation is the right fit for you.

MNP can help

The Licensed Insolvency Trustees at MNP have the knowledge and expertise to help you see the best path out of debt. If your debt feels unmanageable or is holding you back from meeting your goals, book a free, no-obligation consultation with MNP and discover your options.