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What Is Debt Consolidation and Is It a Good Idea?

There are multiple ways you can handle your debt, and one of the most effective ways is with a debt consolidation loan. Is debt consolidation a good idea for you? Let’s break down debt consolidation to find out if it’s the right fit for you.

What is debt consolidation? 

The meaning of debt consolidation is bringing together your multiple types of debt obligations (liabilities) into a single payment. 

Basically, debt consolidation means taking out one big loan to pay off multiple smaller loans or outstanding bills. The big loan repays all your debts to your creditors at once leaving you with one monthly payment, usually with a lower interest rate.

We know, it sounds a bit counterintuitive to take out a whole new loan to pay off other loans. The truth is that debt consolidation doesn’t make sense all the time—the idea is to get a significantly lower interest rate. If that doesn’t happen, there’s no point in going for it. Moreover, it’s important to note that debt consolidation doesn’t mean debt relief, but rather a simpler, more favourable way to pay down your current debt. 

The benefits of debt consolidation are worth it if you get lower interest, especially if you have a good to excellent credit score. Let’s dive deeper into that. 

How does debt consolidation work exactly?  

Let’s meet John. 

Every month, upon getting his salary, John has to think about his debt. He has multiple debts: 

John didn’t start off with the best credit score, but he has been paying his dues on time and his credit score is now 690, which is above average in Canada. Thinking about how to get smarter with his finances, he decides he needs to look into getting a lower interest rate. 

Educated on the idea of debt consolidation, he calculated the new rate he could be paying if he went for it. 

Let’s say John has $20,000 in outstanding credit card debt and is paying an interest rate of 19.99%. He consolidates his loan with a personal loan at 10.99%. John could save up to $95/month over his 5 year term.

So, he got a loan from Symple Loans and he simplified his monthly payments by having Symple Loans pay the creditors AND he got a lower interest rate that is saving a lot of money in the long run. 

John also improved his credit score in the process. You go, John!

Does Debt Consolidation hurt your credit score?

Consolidating multiple accounts into one loan can lower your credit utilisation ratio, which can lower your credit score. However, getting a personal loan to cover your debt will not impact your credit score and can save you money on lower interest rates.

Paying off your credit card debt with an unsecured personal loan can save you money with lower interest rates.
Paying off your credit card debt with an unsecured personal loan can save you money with lower interest rates.

Debt Consolidation vs. Debt settlement. What’s the difference?

Debt consolidation is combining all your debt into one monthly personal loan payment—often at a reduced interest rate. Debt settlement tries to reduce the amount of debt you owe, by either you or a credit counsellor negotiating with your creditors for a lower amount than you owe.

Is debt consolidation a good idea for you? 

It depends. Debt consolidation may be ideal for debts such as credit cards, utility bills and consumer loans. However, it should be noted that not all debts can be combined into a consolidation loan. For example, your mortgage cannot be combined.

There are 2 types of debt consolidation: 

  • Secured loans. This means that you put an asset on the table, like a car or a house, as a collateral. If it sounds risky, that’s because it is. If you won’t make your payments on time, the asset might have to suffer. 
  • Unsecured loans. These don’t involve any assets as collaterals, but it may be a bit more difficult to obtain. 

Before you decide which one you’re willing to take on, you should know that your income and your credit score are very important. 

While companies like Symple Loans take into consideration far more factors than just your credit score, the general rule of thumb is that the higher your credit score is, the more likely you are to be approved. 

Moreover, since we’re talking about the desire to have lower interest rates, a higher credit score will be a helpful tool in getting it. 

Overall, debt consolidation can be a good idea for you if you have multiple debts with high interest rates and you want to simplify your finances, pay off your debt sooner with lower interest rates and fixed monthly payments, and improve your credit score. 

The ideal outcome should be saved time, effort, and cash. If you get a debt consolidation loan offer that has a higher interest rate than your current situation, it’s not a good idea. 

Credit card companies generally have high interest rates.
Credit card companies generally have high interest rates.

What’s the next step? 

A good next step is to explore your options to see if you can get a lower interest rate by consolidating your debt with a debt consolidation loan. The good news is that there are companies out there that make it easier for you. 

The average credit card rates are 19.99%, and for other loan products the interest rates are as high as 25% and up. With these numbers in mind, a personal loan product with rates as low as 6.99% sounds like a dream! 

That’s exactly what you can find at Symple Loan. 

The beauty of getting a Symple loan is the flexible, no fee, early payment plan. With no early payment penalties, you have several options to pay off your loan in partial or in full at any time. 

At Symple, the application assessment allows for a better understanding of your specific circumstances and offers customised interest rates and loan terms. You can apply for loans of up to $50,000. 

Pay off your loan faster while paying less interest over your term. Find out more: sympleloans.ca