Want to pay down your debt faster? Consolidation could be right for you.
Let’s get back to basics! This series unpacks commonly misunderstood terms so you can level up your financial vocab.
Today? DeBt CoNSoLidATiOn. Woohoo. Super fun.
Alright, yes, it’s a boring topic. But it can be helpful for Canadians tackling debt.
What is Debt Consolidation?
Debt consolidation is useful for people with debt in multiple places, like two or three credit cards, or credit cards and a car loan, for example. But the principle of consolidation can also help people with one source of debt too.
How Does Debt Consolidation Work?
Consolidating debt requires that you obtain another loan from a lender. Wait, what? Go into *more* debt? Yep, it sounds weird, but hear us out.
If you have one credit card with 12.99% interest, another card with 19.99% interest, and a car loan with 15.99% interest, you’ve probably got three different payment dates, three different loan contracts, and a bit of a headache.
When consolidating your debt, you may seek out a lender that will offer you more favourable interest rates and terms.
Consider personal loans or lines of credit. Generally offered by banks, loan companies or fintech companies—like us!—these loans can have interest rates that are substantially lower than other types of loans. According to GreedyRates, interest rates on personal loans can be as low as 3% depending on the lender and your credit profile.
In this case, you’d start by adding up all your debt. Let’s say your debt totals $10,000 with interest rates as high as 19.99% on a portion. This will take far longer to pay off than a $10,000 loan with only a 3% interest rate.
So, you’d procure a consolidating loan and use it to pay off the rest of your debt. You would still be in debt for the same amount, but with better terms that make it easier for you to pay off your debt faster.
Plus, then you’ve only got one monthly payment to worry about rather than several.
For folks with only one source of debt, say credit card debt, consolidation may also be helpful in the same way. Procuring a personal loan (or another type of loan) with a lower interest rate to pay off your high interest debt could save you tons of money which would otherwise be paid as interest in the long run.
Is Debt Consolidation Right For Me?
Everyone’s circumstances are different. So debt consolidation might change one person’s life and not-at-all suit that of another. When doing your research into this debt management strategy, you need to make careful, thoughtful decisions.
When considering debt consolidation options, you should consider things like:
- The interest rate on the consolidating loan (if you have bad credit, the interest rates you are offered might be higher, and this can really thwart the power behind debt consolidation);
- The terms and penalties on the consolidating loan (how frequently can you make payments? What if you miss a payment?);
- Your credit score, which may be impacted by closing out old loans and accounts; and
- The terms of your current debt, which may include penalties for early payment or transferring your debt.
It’s often helpful to meet with a professional to discuss your personal circumstances. If you are able to negotiate a better debt situation, it could save you cash and headaches over the years.
Need a personal loan? Check us out! You can get pre-approved in just three minutes on our website, and see if consolidation is right for you.1
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This blog is provided for informational purposes only, is not intended as financial advice, and is not meant to suggest that a particular loan product or financial strategy is suitable for you. If you’re unsure about a particular financial decision, such as obtaining a personal loan or other loan product, you may wish to obtain advice from a qualified professional.
1-Pre-approval is based on information submitted in your MogoAccount application and/or other information that indicates you could meet our underwriting requirements. Your pre-approval for credit remains subject to our credit approval process which includes but is not limited to income and identity verification and validation of information submitted through the Mogo.ca website. To meet our underwriting requirements further documentation may be requested from you. Minimum income requirements may apply for some products. Approval is not guaranteed and we reserve the right to deny services to you. Final approval is subject to review and verification of income and supporting documents provided.