Debt consolidation is a way to alleviate a difficult financial situation. It involves merging multiple debts into one, the objective being to reduce interest rates and the number of individual monthly payments. This can be done through personal loans, personal lines of credit or a mortgage. In general, debt consolidation does not have a negative impact on your credit score as long as there is no defaults. However, it’s important to understand that consolidation alone will not automatically solve your financial problems. It can simply assist you in managing your debt more easily and gaining a better understanding of how to responsibly repay it.
Since a consolidation loan poses a higher risk for the financial institution than a loan used for purchasing an asset, the interest rate charged is typically higher than a regular loan. The rate usually ranges between 12% and 14% (or higher depending on the risk). Therefore, it’s crucial to consolidate only debts with an interest rate higher than that of the consolidation loan. The goal of this approach is not just to have a single payment but also to reduce your interest costs. Before accepting a consolidation loan, ensure that your budget allows for the monthly payment of the loan.