Have you thought about consolidating your debt?

As of September 2021, Canadians’ average household debt represents 177% of their disposable income, up from 168% in 2018. Reporting from Statistics Canada shows our national household debt to income ratio hit a record high in the final months of 2021. If, like many other Canadians, you have competing debts or are unsure of what to pay off first, read on for a few helpful suggestions.

First off, not all debt is equal. If you want to learn more, check out our previous blog, Debt: The Sometime Good, Bad and Ugly for an in-depth look at the different kinds of debt – good vs. bad, secured vs. unsecured – and some tried and true repayment strategies.

So, let’s assume that like many other Canadians, you have some combination of debt, lingering student loans, credit card debt and possibly monthly mortgage and/or car payments. All are weighing on you and detracting from your ability to make headway on your savings strategy and get a good night’s sleep.

For some folks, the most effective way to tackle their debt it to consolidate it. Debt consolidation is the act of amalgamating a number of debts into one larger one, such as a loan. The upside of having only one creditor can be more favourable repayment terms – a lower interest rate, lower monthly payments, or both.

People most often apply for a loan to consolidate their debt through either their bank, credit union or credit card company. Keep in mind, your relationship and lending history with your specific institution can affect whether or not you are approved. For those who aren’t, it is possible to pursue debt consolidation through mortgage companies or lenders.

Like other kinds of debt, consolidation loans can be secured and unsecured. As a refresher, secured means the loan is backed by you, the borrower’s assets. Some type of asset is being held as collateral. In contrast, unsecured loans are not backed by assets and can be more difficult to obtain and may have higher interest rates.

Who should consider debt consolidation? Anyone with multiple debts, high-interest rates or monthly payments, especially if the amount owing is over $10,000. Reducing these various obligations into a single payment with more manageable repayment terms means you can focus all of your efforts and attention on a single payment and cut out unwanted communications from creditors. Lower payments could also mean you might have leftover income to start saving or investing.

Who should think twice before jumping to consolidate their debt? People who may be receiving specialized provisions or interest rate discounts on specific debts, like student loans, that they could end up forgoing. The best course of action is to consult a trusted advisor to ensure you don’t end up negatively impacting other aspects of your finances like your tax refund.

For help with financial planning or any questions you may have about maximizing your savings, connect with us.