Are Debt Consolidation Loans Worth it?

Dear Jeff,

I feel as if I am in drowning in multiple debts that are draining me of my finances and my peace of mind. Would you suggest that I go in for a debt consolidation loan now? Can I use this loan to pay all my existing loans so that I will have only one payment to take care of each month?

– Carol. A
Barrie, Ontario

Carol,

I know how you are feeling. Trying to dig yourself out of mounting credit card debt while juggling multiple monthly bills with high interest rates may leave you feeling overwhelmed.

Are Debt Consolidation Loans Worth it

In such a scenario, there are many ways to get your life back on track. Some workable options include transferring the debt to a low or zero-interest credit card, applying for a second mortgage or home equity loan or paying back your debt through a debt repayment consolidation plan.

If you feel your finances are in good shape, yes, you can definitely go in for a debt consolidation program. Along with proper credit counselling, it can help you with your budget, negotiate lower interest rates on your behalf and help you plan a route out of debt.

You could save money on interest and make payments manageable.
Simply put, debt consolidation combines multiple unsecured debts like the balances on your
credit card, personal loans and sundry other bills into one single debt. Consolidating your debts
into one single payment can actually help you pay off your debt at a fraction of its original cost.
And yes, the new loan is often paid off with a reduced interest rate when compared to your current ones, making payments more manageable, the payoff period shorter or both.

Debt consolidation makes life easier in many ways. Now you can wave goodbye to writing individual cheques to more than one creditor every month, and doing away with errors that often lead to additional charges like late payments.

You should create new money-management habits and monitor behaviour regularly. Keep in mind that debt consolidation doesn’t mean debt elimination. On the contrary, you should think of it as a refinanced loan with an extended repayment contract. Debt consolidation certainly helps you get back on your feet and meet your financial obligations in a responsible manner. It’s important to remember that once you enrol in a debt consolidation program, you should carefully monitor your monthly habits, closely watch your finances and avoid taking on any new debt.

The rewards of debt consolidation: An improved credit score.

In the long run, paying off your debt through a consolidation loan can certainly help improve your credit ratings. You just have to make sure that do not run up new balances on the cards that you are paying off. As you pay off your debt faster, you are freeing up your cash flow and also building strong credit simultaneously.

Yes, a debt consolidation loan is a legal and effective way to get out of debt. But before you enrol in one, you need to be certain that your finances and current lifestyle are the right fit for it.

That’s why we recommend that you contact a trained credit counsellor to help you work out the best option to get out of debt.

Jeffrey Schwartz
Executive Director

Jeffrey Schwartz is the Executive Director of Consolidated Credit Counseling Services of Canada and past President of the Credit Association of Greater Toronto (CAGT).

If you have a question about a debt management program or just about finance in general, Jeff is here to help. Send us an email with your question to AskJeff@ConsolidatedCredit.ca. You’ll get the expert advice you need and your question may be featured here on our website.