Should I Consolidate?

You may be on top of your debt, but perhaps you feel like you could be managing it more effectively.

One option that you’ve likely heard thrown around is debt consolidation. There are pros and cons to consolidating debt, but  it can be a helpful tool when trying to aggressively pay down debt. Is it right for you?

What is consolidation?

Simply, consolidating is combining in all of your debts into one place, so that they get paid off together. The benefits of consolidating are numerous. Usually, it helps simplify your life and free up cash flow. You generally save on interest (this is especially true if you have multiple debts on multiple credit cards). You generally pay down debt more quickly too.

How do I consolidate?

You have a few options. You can either self-consolidate (i.e. combine all of your debts onto one credit card) or get a consolidation loan from your local lender. The first option takes quite a bit of will power and planning, as you will still have empty cards to use at your disposal. Pretend that they are not there, and you should effectively be able to whittle down that debt.

Seeking a consolidation loan from your bank can be an excellent move for those who feel like they need a little support and who are finding cash flow to be a challenge. You simply combine everything, the bank pays out your cards and you are left with one payment.

Points to consider: typically, as part of the loan, the bank will have you surrender your cards. They may leave you with one low balance card to use in emergencies. Also, (but not always) a straight “consolidation” loan can garner higher interest rates than a loan that is secured (i.e. with a house, a car, etc.).

I own a house. Can I use that?

If you have a substantial amount of equity in your home, you can use it to consolidate your debts, typically at a very low interest rate (mortgage rates are much lower than other debt rates).

Be aware though, that you will likely have to incur some costs with this option. Your lender may require an appraisal of your property (although not always), and you may be responsible for paying a penalty if you break your mortgage term to refinance.  If there is not much time left in your current mortgage term, sometimes lenders will waive this because you are borrowing more, but not always.

The best time to do this is when your mortgage is coming up for renewal- and then you can avoid hefty penalties.