The Pros and Cons of Debt Consolidation

It is a common misconception that debt consolidation through a financial institution is always a better option than filing a consumer proposal or declaring bankruptcy.  This, however, is not always the case.  In order to determine the right approach for addressing your obligations, there are a number of factors to consider.

Pros of Debt Consolidation:

Individuals who have a good credit score and are more or less financially stable can usually qualify for a consolidation loan through their bank that will combine all of their debts into one monthly payment.  These can include credit cards, lines of credit and any other consumer loans.  Having a good relationship with your bank and a relatively low income to debt ratio will mean you will likely be able to secure a lower interest rate for your consolidation loan.  This will allow you to pay down your bills with minimal interest, and will give you the opportunity to improve your credit rating as well.

It is important, however, to note that while clearing off all of your credit card and loan debts is a positive step, it can also be tempting to rack up more debt on your credit cards once your consolidation loan has paid them all off, so cancelling your cards, or practicing strict restraint is required in order to achieve your goal of financial freedom.

Cons of Debt Consolidation:

Debt consolidation isn’t the best choice for everyone, even if they may be approved by their financial institution. Those with poor credit or a high debt ratio may actually end up with a higher overall interest rate than they were paying originally, so while their bill payments have been reduced to one monthly loan, they will actually end up paying more than they need to over time to clear their debt.

Also, debt consolidation often encumbers your home or other assets as a means of security.  This may cause you problems if you end up in financial trouble later in life, since you no longer have collateral available to obtain future loans, and you can no longer file for other credit services such as a consumer proposal.

Alternative Options:

If you are thinking about approaching your financial institution regarding a debt consolidation, consider meeting with a Licensed Insolvency Trustee to hear about all of your options.  While a debt consolidation may very well be the best choice from you, you may benefit instead from a consumer proposal.  This process also allows you to address your financial obligations by consolidating your debt and paying either a reduced amount to your creditors or paying the full amount over a longer period of time.  Your Trustee will manage all of the dealings with your lenders, and oversee the arrangement until repayment is complete.