Debt consolidation is ideal for those who are paying a high average interest rate on their debt and are making several different loan and credit card payments each month. Unlike debt settlement, which reduces the total principal that you owe your creditors, the goal with debt consolidation is to roll all your debts into a single payment, and hopefully lower the interest rate you’re paying. A lower interest rate means that your minimum payment is lower, making it easier to afford your debt burden and even pay it off early.

With debt consolidation, you take out one loan and use it to pay off all of your unsecured debts. You are consolidating your debt, not having it written off such as in a personal bankruptcy. After consolidation, you are left with one loan payment at a significantly lower interest rate.

Consider this example: Suppose you have and your spouse have five different consumer loans and credit cards, each of which has a $5,000 balance. Each debt has a different interest rate—8 percent, 10 percent, 12 percent, 14 percent, and 16 percent. With a total debt of $25,000 and an average interest rate of 12 percent you will pay five minimum payments each month: $60.66 on the debt with the 8 percent interest rate; $66.08 on the debt with the 10 percent interest rate; $71.74 on the debt with the 12 percent interest rate; $77.63 on the debt with the 14 percent interest rate; and $83.76 on the debt with the 16 percent interest rate,  assuming a ten-year amortization schedule. That represents a total payment of about $360 a month on your debt over the course of ten years.

AccountBalanceInterest RateMonthly Payment
Line of credit 1$5,000.008%$60.66
Line of credit 2$5,000.0010%$66.08
Credit card 1$5,000.0012%$71.74
Credit card 2$5,000.0014%$77.63
Credit card 3$5,000.0016%$83.76
$25,000 (total)12% (average)$359.87 (total/month)

As many consumer credit counselling agencies will tell you, having to keep up with that many different payments is a major factor in people falling behind on their debt. The more payments you have, the easier it is to forget one or more of them. Therefore, to make things easier and save money, you take out a debt consolidation loan with an interest rate of 10 percent and an eight-year term. That leaves you with one monthly payment of about $315 a month, and you shorten your debt term by two years. It’s easy to see that you will save a lot of money under this scenario.

AccountBalanceInterest RateMonthly Payment
Consolidated Loan$25,00010%$315


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Figure out whether debt consolidation is the right solution for your debt problems or if another option would be better. Fill out the Canada debt relief form for more information on the different debt relief options.