Is debt consolidation a good idea?

Is debt consolidation a good idea? Learn how debt consolidation works and whether it might be a good idea for you.

If you're currently juggling multiple loans, with different interest rates and payment schedules, you probably wish there was a way to simplify your borrowing. Well, there is. It's called debt consolidation - also known as debt restructuring. Debt consolidation can simplify your debt repayment, lower your loan payments, and reduce the total amount of interest you pay each month. But how do you consolidate your debt? And is debt consolidation a good idea?

Read on, to learn more about debt consolidation and decide if it could be a good solution for you. 

What is debt consolidation?

Debt consolidation means taking out a single loan that can be used to pay off your other debts, such as credit cards, lines of credit, student loans and car loans. Simply put, the consolidation loan is one new, larger loan that’s used to pay off the other loans you currently have. One of the best ways to consolidate your debts is by switching to a flexible, lower interest mortgage, such as a Manulife One account1, and then using your account to repay your higher-interest debts. This, in effect, turns your high-interest debt into lower-interest debt.

What is debt consolidation vs. a settlement?

Debt consolidation is different from debt settlement or a consumer proposal.

If Manulife One is not an option to consolidate your debt, you'll apply for a consolidation loan through a lender such as a bank, credit union, or other financial institution.2 They'll review your credit application for factors like your credit score, income, and whether the new loan will be secured with some kind of collateral – such as your home. From there, the lender will decide whether or not they’ll approve the loan, as well as the interest rate that you’ll pay, based on the information in the application. When you get a consolidation loan and make all your payments in full and on time, it shouldn’t have a negative impact on your credit score. If anything, it could give your credit score a boost.

Despite what you might think – debt consolidation isn’t only for people struggling with debt. It can be good for anyone who wants to simplify their borrowing, pay less each month, and reduce the amount of interest they’re paying.

Debt settlement, on the other hand, is a strategy primarily for people struggling with debt. It refers to the process of creating a formal offer known as a consumer proposal. This lets you settle your debt with your lenders by reducing the amount owed and offering partial repayment at no interest through a trustee in bankruptcy. A consumer proposal is an alternative to declaring bankruptcy, although both have a significant negative impact on your credit score.

What are the pros and cons of debt consolidation?

Debt consolidation is more common than you may realize and  might help you free up money each month to achieve other financial goals. For example, if you have a lot of debt, simply making your payments might be preventing you from doing things like saving for retirement or buying financial protection products, such as life insurance, your family needs. Regardless of your situation, if you have multiple debts, consolidation is something to consider.

Debt consolidation can offer some important benefits, including:

  • One simple monthly bill
  • Lower monthly payments
  • A lower interest rate that ensures more of your payment goes toward the principal

However, you might want to think twice about consolidating your debt if you have difficulty managing your spending. In this case, debt consolidation isn’t bad, but you’ll want to limit how much credit you have access to, so you’re not tempted to spend the new credit limit you have available after consolidating your debt. For example, limit yourself to one credit card and make sure you pay it in full every month. When you consolidate your debt, you should also make a plan for how you’re going to manage your spending and reduce your debt over time. An advisor can help with this.

Is debt consolidation a good idea for you?

Debt consolidation can be a useful financial tool for anyone with multiple debts. It can help you simplify your finances and reduce your interest costs and monthly payments. And, the smaller monthly payments could free up cash to address other financial needs or help you repay your debt more quickly.

To learn more about whether debt consolidation makes sense for you, talk to an advisor today.