Is Getting a Debt Consolidation Loan Wise?

Debt consolidation is when you combine multiple debts into one, easy-to-manage loan. 

Having just one loan means you’ll only have one lender, one monthly repayment and one interest rate to worry about. 

This can simplify the process of repaying debt and potentially lower your monthly payments as well as overall interest and fees. 

Want to know more? Read our debt consolidation explainer.

There’s quite a few benefits to this type of loan. Here are some of the perks: 

• Repayments made simple: By consolidating multiple debts into one loan, you’ll have an easier time keeping track of your repayments.

• Less interest: Depending on your credit history, a debt consolidation loan may help you save money long-term if it has a lower interest rate than credit cards or other unsecured forms of debt. 

• Debt-free faster: If your debt consolidation loan is accruing less interest than your old debt, it’s easier to pay off in a shorter period. 

• Smaller repayments: If you have a longer loan term, your monthly repayments may be lower than what you were paying on your old debt.

• Improve your credit scores: If you’re looking to boost your credit scores, over time making on-time payments to a debt consolidation loan can be a way to do it.

Want to see where you stand now? Check your credit scores with Wisr.

When looking for the wisest choice for you, there are some potential downsides to debt consolidation to consider: 

• It’s not a quick fix: We wish debt consolidation was the answer to all our money problems, but the reality is it’s not that simple. While it can simplify your debt and make it easier to get on top of, it’s important to also address any underlying issues that led to your debt. This could be overspending, lack of budgeting, gambling, impulse shopping or something else.

• Excludes some debt types: Not all debt is made equal and some types of debt such as tax debts, student loans and some secured loans - may not be eligible for debt consolidation. Ask your lender specifically what debt they are willing to include in your loan. 

• It may affect your credit scores: Applying for a debt consolidation loan may impact your scores initially, but over time they are likely to improve if you keep up to date with your repayments and avoid late fees. If you miss a repayment on your debt consolidation your credit scores can take a hit too. 

• Potentially higher interest: Before you take out a consolidation loan, take the time to compare the interest rate offered to the interest rates you're currently paying on your debts. The interest rate on a debt consolidation loan may be higher than the rates on your current debts. 

• Your loan may have fees: Debt consolidation loans can come with a variety of fees, including origination fees, application fees, and closing costs. These fees can add up and make the loan more expensive.

• Secured vs unsecured: If your debt consolidation is secured by assets (e.g home and car) and you find yourself unable to make your repayments, you may risk losing them. Read up on secured loans here. 

• Your credit score: Your credit score is an important factor to consider when applying for a debt consolidation loan. A higher credit score can make it easier to get a loan with a lower interest rate.

• The repayment period: This is the length of time you have to pay back your loan. A longer repayment period can result in lower monthly payments, but it can also make the loan more expensive in the long run.

• Loan fees: Before you take out a debt consolidation loan, be sure to understand all the fees associated with the loan, including origination fees, application fees, and closing costs.

• Your debt-to-income ratio: Your debt-to-income ratio is the amount of debt you have compared to your income. A higher debt-to-income ratio can make it more difficult to get a loan, and your ability to repay the loan on time. 

If you’ve crunched the numbers and got a stable income, good credit and a solid repayment plan, then a debt consolidation loan may be a wise choice. However, if you have a low credit score or are already struggling to make ends meet, it might not be the best option.

We think you’ll be hard-pressed to find many financial experts who are in love with credit cards. But when it comes to comparing debt consolidation to credit cards, both have their pros and cons. Deciding which one is “wiser” for you ultimately depends on your financial needs and goals.

Debt consolidation can be a good option if you have multiple high-interest debts and want to simplify your monthly payments into one manageable payment. By consolidating your debts into a single loan with a lower interest rate, you may save money on interest charges and pay off your debt faster. On the other hand, using a credit card can also be advantageous in certain situations, such as when you want to earn rewards for your spending or take advantage of an interest rate offer. 

Ultimately, it's important to consider your financial situation, debt levels, credit score, and goals before making a decision. It may be helpful to consult with a financial advisor or credit counsellor to determine which option is best for you.

A debt consolidation loan can help you to manage your debt and simplify the repayment process. However, it's important to carefully consider the pros and cons of these loans before you make a decision. By weighing the factors such as your credit score, the interest rate offered by the lender, the repayment period, the fees associated with the loan, and your debt-to-income ratio, you can make an informed decision about whether a debt consolidation loan is the right choice for you.

If you do decide to go forward with a debt consolidation loan, be sure to do your research. Also, make a plan for repaying your loan and stick to it, to ensure that you can get back on track financially and avoid falling into more debt.