What is Debt Consolidation?

“Debt Consolidation” is a term we often hear on radio or TV advertisements. Unfortunately, many of these advertisements do not explain very well exactly what debt consolidation is. The purpose of this article is to clear up some of the confusion around debt consolidation and to give you an understanding of how it can help you save money while paying your debts off sooner.

Turning Many Debts into One Better Debt

The concept behind consolidation is to take multiple high-interest debts–such as credit cards, lines of credit, auto loans, etc–and merge them into one low-interest debt. What this allows you to do is reduce the overall monthly payments and interest you are paying. By consolidating, you are able to free up monthly income which can then be used to accelerate debt payments, pay for other necessities, increase your retirement savings, or simply create more breathing room at the end of each month.

Let’s take a look at what debt consolidation looks like in table form (click image to enlarge):

Example of debt consolidation

Example of debt consolidation

As you can see in the table, this client’s multiple debts on the left have been consolidated into one debt on the right. This alone reduces their monthly payments by $1243.79 per month. On top of this, the new low interest rate means that they will also be saving $33,000 in interest over the next five years. You can see how this simple strategy can dramatically improve your financial situation.

 

Using your mortgage to consolidate

Consolidate debt into your mortgage

Consolidate debt into your mortgage

Due to the historically low interest rates being offered these days, your mortgage is usually the best way to consolidate debt. By refinancing your mortgage, you can build your high-interest debts into your low-interest mortgage and realize the benefits outlined above. Even if your mortgage is not maturing in the near future, it may still make sense to refinance now to take advantage of the thousands of dollars in interest you can save.

Common Questions and Answers

What does it mean to “refinance”?

Simply put, refinancing is when you re-borrow money you have already paid towards your mortgage. People often do this as a cost-effective way to borrow money after having paid off a portion of their original mortgage.

Will debt consolidation hurt my credit?

Debt consolidation should not be confused with a consumer proposal or bankruptcy where your credit is damaged for a period of time afterwards. Debt consolidation is simply a money management strategy. In fact, by better managing your debt, consolidation often improves your credit score.

How much can I consolidate?

If you own a home, you can refinance up to 80% of its market value. For example, if the market value of your home is $200,000 you can borrow $160,000 ($200,000 x 0.80). Subtract the amount you currently owe on your mortgage and you will be left with the available “room” you have left to consolidate other debts. For example, if your current mortgage balance is $100,000 you can consolidate up to $60,000 worth of other debts into your mortgage.

Why haven’t I heard of this before?

As mentioned at the beginning of the article, there is a lot of confusion about what debt consolidation actually is. This is understandable since banks do not normally promote this idea; they would rather see their clients take out lines of credit–which charge higher interest rates. Fortunately, people are becoming more aware of their options and are seeing that debt consolidation is a great way to reduce debt faster and free up extra cash each month.

Debt consolidation is a great way to minimize your monthly payments, save thousands in interest, pay down your debt sooner, and reach your financial goals faster. If you are interested in finding our more, please feel free to Contact Us or fill out our no-obligation Application if you would like us to review your details and contact you directly.