Debt Consolidation – Is it Worth Pursuing as a Debt-Management Strategy?

To understand what debt consolidation is all about, we need to think of ourselves as doing battle with a seemingly unbeatable foe. Sometimes, a single larger enemy is much easier to fight than multiple smaller ones that are scattered around you. That’s because you aren’t distracted on multiple fronts.

Untamed debt can derail even the best laid financial plans. But are there viable strategies that can be implemented to wrestle with the beast of debt? Let’s find out!

Henrik Ibsen, the famous 17th century Norwegian playwright, knew a lot about debt. You see, before he became one of the world’s most renowned dramatists, he struggled with debt. So deep was his conviction that debt isn’t a good thing, that he wrote:

“Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt.”

Many Canadians are faced with a similar situation today, as Ibsen found himself all those centuries ago. Untamed debt can not only ruin health and home, it can inflict you with one of the worst “illnesses” of modern time: A poor credit score!

Debt Consolidation

Thankfully today, there are things (other than fleeing into exile as Ibsen did!) that you can do to manage your debt, and to consign it to the rear-view mirror.

Debt Consolidation – Taming the Untameable

To understand what debt consolidation is all about, we need to think of ourselves as doing battle with a seemingly unbeatable foe. Sometimes, a single larger enemy is much easier to fight than multiple smaller ones that are scattered around you. That’s because you aren’t distracted on multiple fronts.

And that’s exactly what debt consolidation does for us:

  1. It consolidates a number of our smaller, fragmented debts into a single larger one
  2. In doing so, it helps us draw focus away from multiple fronts, to the single (albeit larger) objective that we need to fight
  3. And while we battle this seemingly untameable foe, debt consolidation offers us an opportunity to discharge our debts cost-effectively – by paying less in interest than we otherwise would had we been dealing with multiple debts

When you have multiple sources of debt to deal with, such as Student Loans, Credit Card Loans, Mortgages, or overdue Personal Loans, things can feel overwhelming.

  • You have multiple creditors calling you to pay off their balances
  • You are drawn into multiple meetings with representatives from different organizations
  • You have to juggle multiple payment schedules, each with varying due dates, installment amounts, interest rates and late payment penalties

Many, that are dealing with multiple debt scenarios, spend more time managing these multiple debt sources than they do on working and earning enough to pay off the debts. It seems like a “No Win” situation.

Debt consolidation changes all of that.

Debt Consolidation – How it Works

As alluded to earlier in this post, a debt consolidation strategy is one where many debts are replaced by a single – larger – debt. Here’s how it works:

  1. You contact a debt consolidation specialist (Consolidator), and discuss all of your debts with them
  2. They then work with your various creditors, and negotiate a debt settlement strategy, and advance you the money required to pay off all your outstanding balances (some Consolidators pay your creditors directly)
  3. You now owe the consolidator a single (larger) debt, as represented by a total of all the debts they repaid on your behalf, plus applicable fees and service charges

The obvious question that might be on your mind is:

“So, what’s the use of swapping many smaller debts with a single, larger one?”

Two of the greatest advantages of doing so include:

  • The fact that you are now just dealing with a single creditor, so you spend less time managing your debts on multiple fronts!
  • The new (somewhat larger) debt often comes with more favourable initial terms (“teaser rates” and “introductory offers”) than the other multiple debts it replaces, which you can leverage to become debt-free quicker, and for less cost (interest)

In providing you the “limited time” favourable terms, debt consolidation encourages you to focus on discharging all of your debt, or as much of it as you can, before the limited-time offers run out. What better motivation can you have to get serious about debt retirement, than the opportunity to save on interest payments?

Beware of Pitfalls

There are a number of debt consolidation vehicles out there and, depending on your personal circumstances, either or all of them might fit within your debt reduction strategy. You need to do your homework first, before deciding on which approach to take.

Loan Repayment Calculator

For instance, if it’s a personal loan that you need to discharge your debt, you could use the Loan repayment calculator to do the math for you. You can then run various scenarios (Principal amount, Interest Rates, Time, Repayment Frequencies etc.) to see what terms give you the biggest return for your loan, versus what your current debt-servicing costs are.

Alternately, you may opt for a Balance Transfer Card as your means to consolidate and manage your debt. If that’s your strategy-of-choice, you could use the Credit Card balance payment calculator to see how various balance repayment options can put you ahead in the debt repayment game.

However, before choosing any of the debt consolidation strategies, there are some things that you need to keep in mind:

  1. Debt consolidation is NOT a debt forgiveness. You’ll still have to pay off your debts in full – albeit at a different repayment schedule and to a different creditor
  2. Do not be fooled by the unbelievable “teaser terms” offered to you. Many users of debt consolidation services, who go into debt consolidation without a focused plan, aren’t able to benefit fully from those rates anyway!
  3. If you don’t think that you’ll be able to repay all (or most of) your debts within the introductory offer period, then you might need to rethink debt consolidation as your only debt-management strategy. Why?
  4. Because the “normal” (not teaser or introductory) debt consolidation rates of interest are often higher than those of the debts they replace. As a result, post the intro period, you could end up paying much higher amounts in interest payments than before!
  5. Don’t forget to factor consolidation and balance transfer fees into the mix. In some cases, these costs could add up to a lot and ultimately make debt consolidation a not so attractive debt management strategy

Having said all of the above, to most Canadians struggling to manage their debt, debt consolidation might be worth looking at as a debt management strategy. If you work with a credit counselor, they could help you put together a debt consolidation plan that works just for you.

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Nilay Lad

Nilay Lad

Co-founder, Advisor & Guest Blogger

Nilay holds 14+ years of experience in developing and delivering strategies to grow and digitise banks through proposition development and improving customer experience.

This information is just our view and should be not be considered advice of any sorts.
From our experience and other professionals we partner and engage with, we work to find useful tips and information that would be important to share.