Is it time to consolidate debt?

header image for debt consolidation post by fairstone

If you’re behind on bill payments and feeling overwhelmed by the amount of debt you have, you may be researching what steps you can take to get your debt to a more manageable level. It’s likely you’ve come across debt consolidation as a solution to help you get your finances back on track.

If you’re wondering what debt consolidation is and if it’s right for you, our partners at Fairstone shared several scenarios where debt consolidation is worth looking into.

First, let’s explain what a debt consolidation loan is…

A debt consolidation loan is a loan that’s large enough to cover all of your outstanding debt. You use the loan to pay off outstanding debts or bills, like a car loan, unpaid phone bill, student loans or credit card balances. Then, you make payments on the new debt consolidation loan, typically at a lower interest rate or with a more manageable payment schedule than your previous bills combined. Usually, a debt consolidation loan is designed to help reduce your borrowing costs and pay off debt faster.

If any of the following statements apply to you, it might be time to consider a debt consolidation loan:

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You struggle to keep track of multiple payment deadlines

A debt consolidation loan allows you to combine several outstanding debts or bills into one payment deadline. Even if you have enough money coming in to make all of your payments, it can be difficult to stay on top of your finances when you have several payment deadlines scattered throughout the month. If this feels relatable, then choosing a debt consolidation loan with a monthly payment can help. You can ask your lender to set up the payment on a day that’s convenient for you, like at the beginning of the month or on the day you are paid.

You consistently carry a credit card balance

If you’re consistently carrying a credit card balance and only making the minimum payments each month, it’s going to take you a very long time to climb your way out of debt. In Canada, credit card companies are legally obligated to show how long it will take to pay down the balance making only minimum payments. Take a look at this number on your next statement. Is that how long you’re willing to wait to be debt-free?

For those wanting to be debt free sooner, a debt consolidation loan offers a structured payment plan. Unlike a credit card, which is a revolving debt, a personal loan or installment loan used for consolidation is paid back through regular, fixed payments. That means you pay the same amount of money each time you make a payment. At the end of your loan term, your debt is paid off and you’ll have to apply for more money if you want to borrow again. In comparison, a credit card is a type of open (“revolving”) credit, meaning you can borrow money as long as you have credit available. It can be tough to avoid the temptation to spend money you don’t have until you’ve established better credit habits.

You’re paying a high interest rate on your debt

If you’re paying a high interest rate on your debt, you might be able to reduce your interest charges through a consolidation loan. Depending on the damage you’ve done to your credit, you might only be able to knock down the interest rate a little bit, but it’s worth seeing what’s available to you. If you’re a homeowner, you can look into a secured loan. Secured loans are backed by your home, giving your lender more confidence that you’ll pay it back on time. Since there is less risk involved for the lender, they’ll typically offer you a lower interest rate. The lower your interest rate, the more each payment will be going towards your principle, meaning you’ll pay less in borrowing costs.

Missed or late payments have negatively impacted your credit

A debt consolidation loan is designed to make paying off your debt more manageable. This can be unlike a credit card, which doesn’t offer a structured repayment plan and can even have a fluctuating interest rate depending on how many late or missed payments you’ve accumulated. The right lender will work with you to create a payment plan that fits your budget and helps you become debt free within a timeline that works for you. Since your payments should be budget-friendly, a debt consolidation loan gives you the opportunity to make on-time payments. The more you demonstrate positive payment behavior, the better this will reflect on your credit score.

Therefore, a debt consolidation loan gives you a unique opportunity to not only pay down your debt, but also to increase your credit score at the same time.

Conclusion

A debt consolidation loan isn’t a magic solution to make all your debt go away. You still have to make some sacrifices to pay the loan back and address the behaviours that got you into debt in the first place. But it can simplify your finances, allowing you to focus on learning new money management habits.

Are you interested in finding out if a debt consolidation loan is right for you?

All you’ll need to do is enter a few simple details and find out how much money you could qualify for and what your payments might be, and there’s no obligation and no impact on your credit score.

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Fairstone

Author

Fairstone is one of Canada's leading non-bank lenders, with roots in Canada since 1923. They offer flexible loan products, from personal loans to home equity loans and debt consolidation.

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