What is Debt Consolidation?

Debt consolidation simply means combining multiple debts into one single monthly payment. The main appeal? You only deal with one bill instead of several, and you might get a lower interest rate that helps you pay off your debt faster.

Whether it's the right move depends on your specific financial situation and what you're comfortable with.

Methods of debt consolidation

There are several ways to consolidate debt, depending on what you owe, your credit status, and what assets you have.

First, let's understand the difference between secured and unsecured debt:

• Secured debts are tied to something you own, like your house or car. If you stop paying, lenders can take these assets.

• Unsecured debts don't have collateral but can still lead to collection calls or wage garnishment if unpaid. These include credit card debt, student loans, and medical bills.

Here are three common ways to consolidate debt:

1. Credit card balance transfer

Moving all your credit card balances to a new card with a lower promotional rate can save on interest. Look for cards with interest-free periods that reduce or eliminate transfer fees.

Just remember that when the promotional period ends, the interest rate might jump significantly.

2. Home equity loan

If you own property, you can borrow against your equity. It is usually up to about 80% of your home's value. You get a lump sum and repay it in fixed installments. The interest might be tax-deductible, unlike credit card interest.

But be careful, your home is at risk if you can't make payments.

3. Debt consolidation loan

This is a personal loan specifically for paying off multiple debts. It can simplify your finances by replacing several payments with just one, ideally at a lower interest rate.

Watch out for scams

The debt consolidation industry has its share of scammers. Be skeptical of unsolicited offers that sound too good to be true. Some companies push high-interest loans that actually increase your debt, while others might take your money without paying your creditors.

Always do your research before signing up.

Other options to consider

Beyond traditional consolidation, you might want to explore alternatives that could help manage your debt situation in different ways.

1. Credit counselling agencies

These agencies help you create a budget, learn money management skills, and develop a debt management plan. The Canadian government provides resources for finding reputable counsellors, and consulting with them won't affect your credit score.

2. Debt settlements

Debt settlement companies negotiate with creditors to accept less than what you owe. You'll pay high fees whether they succeed or not, and their tactics (like delaying payments) can damage your credit.

The bottom line on debt consolidation

Consolidating your debt doesn't magically make it disappear. It might feel more manageable when you're only making one payment, but you still need to be mindful of your spending and budgeting.

Taking control of your debt situation is a positive step. Make sure you're choosing the right option for your circumstances and working with trustworthy organizations.