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Why Should I Consolidate My Debt?

8 good reasons to consider debt consolidation.

Debt consolidation is a debt relief option where you borrow money to pay off existing debt. You take out one new larger debt at a lower interest rate and use the funds to pay off multiple, smaller higher interest rate debts. This can provide a range of benefits in the right financial circumstances.

How to get out of debt

Simplified repayment

Juggling multiple bill payments throughout the month can certainly present some challenges for your budget. Depending on when you receive your paycheque and when bill due dates fall, it can be easy to find yourself coming up short. This can lead to missed payments, late fees, and penalty interest.

With debt consolidation, you also consolidate your bills into one payment. Instead of juggling multiple credit obligations, you have one loan payment. This simplifies your payment calendar and helps minimize the chances of missing a payment.

Save money as you get out of debt

One of the primary goals of debt consolidation is to lower the interest rate applied to your debt. Doing so minimizes the accrued monthly interest charges applied to your balance. As a result, you save money overall.

For example, let’s say you owe $10,000 on your credit cards at an average APR of 20 percent.

  • On a standard 3 percent minimum payment schedule, you can expect to pay over $12,000 in total interest charges
  • The same debt paid off with a loan at 10% APR over a 5-year term would have total interest charges of less than $2,800

As you can see, you save a significant amount of money by consolidating your debt.


In addition to the total cost savings of debt consolidation, there may also be monthly cost savings. In many cases, consolidating your debt will lower your total monthly payment, reducing the cost burden on your budget.

Using the example above, the required minimum payment prior to consolidation would be $300. After consolidation, the monthly loan payment would be $212.

It’s important to note that both monthly and total cost savings are dependent on the term you choose for your loan. A shorter term will increase the monthly payment but decrease your total costs and vice versa.

  • The monthly payment on a 3-year term loan would be $323 with total interest charges of $1,617.
  • The payment on a 4-year term loan would be $254 with total interest charges of $2,174

In general, you want to choose the shortest term possible that offers monthly payments you can comfortably afford.

Less financial stress

Financial stress can take a toll on your physical and mental health. It can distract you at work and lead to conflict at home. Worrying about bill payments and calls from creditors and debt collectors if you start to fall behind is not good for your health.

By consolidating your debt and simplifying your payment schedule, you can reduce this stress.

Know when you will be debt-free

Another mental benefit of consolidation is that you will have a definitive date when you will achieve freedom from your debt. A debt consolidation loan has a set term. You have an exact date when you will finish making the payments.

With credit cards, it can feel like you are stuck in a never-ending cycle of debt. There is no end date to look forward to as you work to become debt-free.

Or course, this also means that you must be diligent about avoiding new credit card charges once you consolidate. You should set a budget that includes savings to cover emergencies and unexpected expenses.

This will help you avoid running up new balances that send you back into that cycle of debt.

Consolidation is good for your credit

Debt consolidation should have a positive effect on your credit. Unlike other debt-relief options, it does not generate any negative items in your credit report.

In addition, consolidation provides a range of positive benefits for your credit score:

  • It helps you avoid missed payments, which negatively affect your credit history.
  • It builds a positive payment history will the new loan.
  • You reduce your credit utilization ratio, which measures how much of the total available credit limit that you have available.
  • Since consolidation does not require you to close your credit cards, you also maintain your credit age and the number of active accounts that you have in good standing.

It is important to note that applying for a debt consolidation loan will create a hard inquiry on your credit file. This happens when you authorize the loan officer to check your credit during the application process.

Inquiries will drop your credit score by a few points. However, the decrease is minimal, and your score should recover quickly. Just be certain to only apply for one loan and space out any other credit applications by at least six months.

Protect your assets

A debt consolidation loan is an unsecured form of credit. You are not required to use any collateral to secure the loan.

This offers an advantage over other debt refinancing options, such as Home Equity Lines of Credit (HELOCs). With a HELOC, you must use your home as collateral to secure the credit line. Should you default on the HELOC payments, you may be at risk of foreclosure.

Consolidating your debt also helps you avoid bankruptcy, where you must surrender your assets to the Licensed Insolvency Trustee handling your filing. Any assets that do not qualify for an exemption will be sold and the proceeds will be used to pay your creditors.

Avoid negative public records

Another downside of bankruptcy, as well as filing a consumer proposal, it becomes part of a permanent public record. This bankruptcy and insolvency record is accessible to anyone who makes a request for the information.

While most people you meet in your daily life will never know of or see this record, it is publicly available.  If possible, it’s best to avoid this.

Debt consolidation calculator: Is it the right time to consolidate?

This calculator can help you evaluate the cost benefits of debt consolidation. You can compare the monthly payments and total interest charges of consolidation to other solutions.

See how consolidation stacks up versus credit counselling, consumer proposals, and even simply making fixed monthly credit card payments.

940 months
Total Paid: $150,000
Savings: $35,000

4 reasons why you shouldn’t consolidate your debts

While there is plenty of good reason to consolidate, it is not a cure-all that will work in every circumstance. In fact, when used in the wrong circumstances, you could make your financial situation worse. Here are some reasons why may want to consider other options instead of debt consolidation.

You have a small amount of debt

A debt consolidation loan can be a great solution when you’re juggling multiple credit cards with high balances. On the other hand, you should not apply for new financing frivolously.

If you only have one or two credit cards and owe a few thousand dollars, there may be other solutions available. You may be able to make fixed credit card payments to pay down your balances quickly.

You could also consider a balance transfer. Balance transfer credit cards offer low APR on balances transferred from other accounts. What’s more, many offer 0% APR for up to 18 months when you open the account. This gives you time to pay off your debt interest-free.

You have too much debt

Another situation where consolidation may not be beneficial is when you have a large amount of debt. Personal loans generally have a maximum limit of $50,000.

If you owe more than $50,000 in total, then a debt consolidation loan will not be able to provide one monthly payment to cover all your debt.

Another issue with high volumes of debt is that you may not qualify for the loan at all. When you apply for a loan, the loan officer will check your debt-to-income ratio to make sure you can afford the payments.

Even if you owe less than $50,000, if you have a low income then the lender may decide that you cannot afford the loan. They will reject your application.

You should check your debt-to-income ratio before you apply to see if you can qualify.

You have poor credit

A lender will also check your credit when you apply for a debt consolidation loan. Lenders generally have a minimum credit score requirement for personal loans. If you have poor credit, you will not meet that requirement and will not qualify for the loan.

According to Equifax, a poor credit score is any score below 560 and you are likely to have difficulty qualifying for a loan. Even if your score is between 560-660, you may have trouble qualifying for a loan on the right terms. In other words, the interest rate on the loan may be so high that it would not provide any cost savings for you.

You have bad financial habits that consolidation won’t fix

In some cases, debt is unavoidable. You may be forced to take on debt due to a bad situation that you simply can’t cover with emergency savings.

On the other hand, if the underlying causes of your debt are overspending and a failure to budget properly, then consolidation won’t fix the real issue. In this situation, you can end up with more debt instead of eliminating the debt you have.

Debt consolidation will clear your credit card balances but leave the credit cards open. You can run up new balances with new charges. Then you will be juggling the debt consolidation loan payments along with credit card payments.

In this situation, the real solution is to change your financial habits. Set a budget, rein in your spending, and realign to manage your money better. Once you take these steps, you can develop a plan to pay down your debt effectively. However, until that occurs, consolidating your debt could be hazardous to your financial health.

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