Debt Consolidation: Looking Past the Monthly Payment
Consolidating several debts into one loan can simplify payments and sometimes reduce cost. The common mistake is to judge the result by the new monthly payment alone.
Why the payment can mislead
Spreading a balance over a longer period reduces each payment while increasing the total interest paid. A consolidation that lowers your monthly outlay by stretching the term may cost more over its life than the debts it replaced.
Compare the full repayment cost
Add up what you would pay to clear the existing debts on their current terms. Then add up the total cost of the consolidation loan: interest over the term, fees at funding, legal and valuation costs if the loan is secured, and any penalties for repaying the old debts early. Compare those two totals, not the monthly figures.
Account for new security
If the consolidation loan is secured against a home or other asset, you are pledging that asset to replace debts that may have been unsecured. That is a meaningful change in your position and should be a deliberate decision.
Fix the cause
Consolidation addresses the balance, not the reason it built up. A budget that prevents the balances from returning is part of a successful consolidation. The Financial Consumer Agency of Canada publishes general guidance on debt consolidation that is worth reading before you decide.
This article provides general information and is not personal financial, tax, legal, or insurance advice. Obtain advice relevant to your circumstances before entering a financing arrangement.
