Too many debts can make it hard to stay up to date with payments. If you're only paying the minimum, it can also seem nearly impossible to reduce those bills. Debt consolidation may be the solution: a loan that puts all your debts together, often at a lower interest rate.
But not all consolidation programs are the same. Here's what to consider when thinking about debt consolidation, as well as a handy calculator to help you decide if it's worth it.
In a typical debt consolidation process, your bank or credit union will loan you money in the amount of your outstanding debt. You pay off those debts immediately, pay off the loan over a set term, and you are -- at least in theory -- in the clear. There's only one payment, usually no fees, and the interest rate is probably lower than what you pay on a credit card.
Debt consolidation may be achieved through home refinancing. This is using part of the equity in your home. Some lenders call this a second mortgage.
There are other ways to consolidate debt. You can use a line of credit or overdraft to put your debt into one place. You also may have the option to put all of your credit card debt into one, lower interest rate, card.
Credit counselling societies, which operate in many provinces, can also help you through other options like a debt management program, consumer proposal or debt settlement. These are typically more structured arrangements with legal consequences and require consultation with a licensed advisor.
Consolidation usually involves credit card debt, car loans, personal loans, lines of credit and similar liability. Although you can use home equity for a consolidation loan, you normally can't include your mortgage debt in the types of debt you can consolidate.
There are many reasons why consolidation could work. A loan comes with a fixed term and fixed monthly payments. That means that at the end of the term, the debt is paid off. At the same time, your previous liabilities -- credit card balances, for example -- are down to zero.
Since banks and credit unions may offer you a better rate on a loan than a high-interest credit card, you pay less out of pocket. Your debt, therefore, costs less over the long run. Also, a consolidation loan can have a positive impact on your credit rating if you make the payments on time.
Not everyone will get approval for a consolidation loan. Most banks want some kind of security before they will lend funds for this reason. That's why second mortgages or home refinancing are so often discussed by borrowers in this situation.
Even if you are approved, you may face another challenge: not getting into debt once again. While some lenders will pay off and close your revolving credit accounts -- those high-interest credit cards whose debt you have just consolidated -- some may leave them open. As the cardholder, you may opt to keep them open because open accounts in good standing are better for your credit history.
Life sometimes happens, and it is not always easy for everyone to stick with the loan repayment program and not incur any more revolving debt.
Debt consolidation, when used the right way, can remove significant financial stress. You can start by running some of the numbers to see if it might work for you. Rates.ca has a Debt Consolidation Calculator that can help you assess how much equity you can use from your home to pay off your other liabilities. Have a look and see what options you may have.