Coping with Rising Debt Levels
There are very few Canadians who do not need some sort of help with their finances. The pandemic has posed extraordinary challenges to how we work, shop, spend and save. Also, an historically high level of inflation is stressing our budgets, especially on essentials such as food, gas, and accommodation.
Some Canadians have been able to weather the storm, protected by secure jobs or a lack of personal debt. But many of us are struggling under a mountain of personal debt and seeking ways to make precarious finances manageable.
For some, declaring personal bankruptcy may seem like the only way out – but it is a drastic and potentially destructive step that may in fact be unnecessary. One alternative that many people are embracing is ‘debt consolidation.’ It is a way of bundling all your personal debt into one manageable package, rather than coping with a confusing, competing array of creditors. There are pros and cons to consolidation; the good news is, for debtors it is a viable option, and an important one to consider.
Why Consolidate – The Pros and the Cons
Consolidating your credit card debts and other borrowing brings clarity to your financial obligations. This is especially true if you are juggling an array of debt to different creditors. It is much easier to know exactly where you stand financially if you are only making one umbrella payment. You have more certainty of budgeting - and psychologically this can be a huge boost to your process of climbing out of debt.
In line with that clarity, with consolidation you will be paying a fixed interest rate for a defined period of time, rather than juggling a welter of varying interest rates and loan terms. (For example, credit card repayment rates can vary wildly, from card to card and also over time, as interest rates change.)
If you have a good credit score you may be able to lock in your debt at a lower rate than you were previously paying on your various debts. (There is a potential downside here: if your credit rating is poor, a debt consolidation lender may only offer a loan at a potentially higher rate.)
A Lower Interest Rate is Possible
If your consolidated interest rate is in fact lower, you should be able to pay down your debt earlier. Alternately, you may be able to negotiate payment of the consolidated debt to be spread over a longer period – thus lowering your monthly payments. (This will, however, mean you will pay more over the life of your loan.)
But beware: consolidating your debt does not mean you now have a personal ATM. Your debt is still there, and the goal of consolidation is to allow you to pay off your debts as they now stand – NOT accrue new ones.
Finally – and in the long term - debt consolidation can also have a positive effect on your overall credit rating, if you continue to make each payment in full, and on time.
A debt consolidation lender can advise you on how to get a handle on how this process. It could be a positive first step to getting help with your finances.
