Published July 13, 2023 • 3 Min Read
If you’re like many Canadians, financial stress can take a toll on your overall sense of well-being. While debt consolidation may not be for everyone, it is one of several strategies available to manage current debt loads. It’s important to know all the facts before deciding if debt consolidation is right for you.
What are the potential benefits of debt consolidation?
Lower interest rates: A potentially lower overall interest rate is one of the most attractive features of a debt consolidation loan. By consolidating debt from multiple sources, such as credit cards and high-interest department store cards, into a single loan, borrowers may be able to pay off their debts quicker and reduce overall interest charges.
Simplified debt repayment: Debt consolidation allows borrowers to combine debt from multiple sources into a single loan. By reducing the number of payments and due dates in one place, borrowers may feel better organized and less stressed. Debt consolidation can also help simplify budgeting by reducing the number of creditors to track.
Improved cash flow: By merging higher-interest debt into one loan at a lower interest rate, debt consolidation may lower monthly payments, helping to provide borrowers with an improved cash flow. This increased cash flow can then be allocated towards faster debt repayment or other financial goals if desired.
What are the potential drawbacks?
Greater debt accumulation: While a consolidation loan can help simplify debt repayment, an important factor to consider is being able to manage future spending. Consolidating outstanding debts into one lower monthly payment may create a false sense of financial relief, which could lead to continued or increased spending and greater debt accumulation. By not addressing spending habits upfront, borrowers might end up in an even worse financial position.
Credit score impact: Applying for a debt consolidation loan, can have a negative impact on your credit score, as lenders typically make a ‘hard inquiry’ into your credit report, which can temporarily reduce your score.
Paying down debt requires patience and discipline. Debt consolidation can be a beneficial strategy for many individuals but may not be appropriate for everyone. Take the time to understand your personal circumstances, weighing the benefits, such as reduced overall interest costs and improved cash flow. If you are committed to becoming debt-free, debt consolidation may be a sound strategy to consider.
Interested in learning how debt consolidation might help your financial picture?
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.
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