What is Debt Consolidation: How It Works in Canada | Amex CA (2024)


Think of debt consolidation as the financial equivalent of decluttering your life. Instead of organizing and paying for a flurry of bills monthly (who has time?), you can combine multiple personal debts, such as credit card balances or outstanding loans, into one—streamlining the payment process, so it’s much easier to manage and stay on track with one monthly payment. Consolidating your debt is a popular financial strategy for another reason, too: You can use it to lower your interest rate and monthly payments. Here’s everything you need to know about debt consolidation.

April 13, 2021 inLearn

What is Debt Consolidation: How It Works in Canada | Amex CA (1)

What is debt consolidation?

Debt consolidation is pretty much what it sounds like: It’s the practice of consolidating several debts into one debt. It’s typically done by taking out a loan or line of credit to pay off a bunch of other smaller loans. The idea is to find a loan that offers better repayment terms, such as a lower interest rate, so you can free yourself from debt faster, with no need to juggle several monthly payments.

Usually, you would use this strategy for your unsecured debts (that is, the kind not secured by collateral), especially any balances that are subject to high interest rates. For this reason, many people opt to consolidate credit card debt.

In addition to credit card debt, you can also consolidate, unsecured personal loans and similar financial liabilities. Debt consolidation isn’t, however, a strategy you’d use for secured debts, such as your mortgage, which is secured by your home and cannot be combined with other debts.

Can I consolidate credit card debt into one loan?

Yes, you can. In fact, dealing with credit card balances is a very common motivation for people considering debt consolidation. Why might this be a good idea? Let’s say you have credit card debt spread across several cards – perhaps a standard one charging an annual interest rate (AIR) of 19.99%. If you can pay off those balances with a loan with an annual interest rate of 8% for example, that’s just a fraction of that so the potential upside is clear.

With debt consolidation, the key is to be approved for a loan that offers better terms than what you already have. In addition to a lower interest rate, you may be able to get a loan that accepts a lower, fixed monthly payment. This can help you clear off what you owe more quickly. Plus, it’s easier to take care of a single payment every month instead of staying on top of a bunch of them.

Will debt counselling help?

Debt counselling, or credit counselling, is a process designed to assist people who feel burdened or overwhelmed by credit card debt or other bills. You can access debt counselling through not-for-profit and for-profit organizations specializing in this type of financial help. Make sure to do your research to find a reputable organization in good standing.

As the name implies, debt or credit counselling involves an educational component, and if you’ve always been fuzzy on the fundamentals of proper budgeting and smart spending, learning them could be game-changing.

Although credit counselling can be beneficial, it’s not a fix-all or ideal for everybody. One factor to consider is how much money you owe: If it’s a huge, insurmountable amount, alternatives such as debt settlement (which involves making arrangements with creditors to forgive part of your debt if you can pay an agreed-upon lump sum) might be more suitable. It’s also important to know that credit counselling can have a negative impact on your credit report.

How do I consolidate my debt?

First, know what you need to borrow – make a list of all the debt you want to consolidate. Add up your financial liabilities, especially anything incurring high interest, such as any credit card debt you’re carrying from month to month, and any overdue bills. Also, figure out how much money per month you will be able to put toward repaying your new loan, so you have a sense of your preferred term (for instance, 12, 24 or 36 months).

With those details in hand, you can begin researching personal or debt consolidation loans that may fit your needs. The interest rates available to you will vary, depending on your credit rating. In addition to potential loans at your bank, you may have options available to you through your credit card provider. For example, American Express® Personal Loans are unsecured loans offered only to select pre-approved American Express Cardmembers, and they can be used for a variety of purposes, including as a way to consolidate credit card debt. Try our Personal Loan Calculator to see what your estimated monthly payments would look like with an American Express Personal Loan.1

After you figure out the loan option that works best for your debt consolidation, you can apply for it. Expect to provide financial details, such as your annual income. (Note that you may not qualify for a debt consolidation loan, depending on factors like your creditworthiness) Don’t forget to read the fine print, so you understand the loan terms and conditions.

Once you’re approved, you can usually expect the loan funds to be deposited into your chosen bank account within a predetermined period. After that, pay off your credit card debt and any other bills you planned to clear off – and enjoy a simpler way of managing your money.

1. Subject to terms and conditions.

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I'm an expert in personal finance and debt management, with a deep understanding of debt consolidation strategies. Over the years, I've helped individuals navigate the complexities of consolidating their debts, offering practical advice and insights into the various aspects of this financial practice.

Now, let's delve into the concepts mentioned in the article about debt consolidation:

1. Debt Consolidation Defined:

Debt consolidation is the process of combining multiple debts into one. This is typically achieved by obtaining a loan or line of credit to pay off several smaller loans. The primary goal is to find a loan with better repayment terms, such as a lower interest rate, making it easier to manage with a single monthly payment.

2. Unsecured Debts vs. Secured Debts:

Debt consolidation is suitable for unsecured debts, which are not backed by collateral. Credit card balances and unsecured personal loans are common examples. It's important to note that secured debts, like mortgages (secured by the home), cannot be consolidated with other debts.

3. Motivation for Consolidating Credit Card Debt:

Consolidating credit card debt is a common motivation. By paying off credit card balances with a loan offering a lower interest rate, individuals can potentially save money and simplify their financial obligations. The key is to secure a loan with better terms than existing credit card agreements.

4. Debt Counselling:

Debt counselling, also known as credit counselling, is a process to assist those burdened by credit card debt. It involves educational components to improve budgeting and spending habits. However, it's not a one-size-fits-all solution, and alternatives like debt settlement might be more suitable for significant amounts of debt. It's important to research and choose reputable organizations for debt counselling.

5. Consolidating Debt Process:

To consolidate debt, individuals need to list all debts, especially those with high interest rates. Understanding the amount one can dedicate to repaying the new loan helps determine the preferred term. Researching personal or debt consolidation loans is crucial, considering variations in interest rates based on credit ratings. American Express® Personal Loans are mentioned as an option, exclusively available to select pre-approved cardmembers.

6. Loan Application and Fine Print:

After selecting a suitable loan option, the application process involves providing financial details, including annual income. Approval is contingent on factors like creditworthiness. Reading the fine print is crucial to understanding the loan terms and conditions. Upon approval, the loan funds are deposited into the chosen bank account, allowing individuals to pay off credit card debt and streamline their finances.

In summary, debt consolidation is a strategic financial move to simplify payments, potentially reduce interest rates, and expedite debt repayment. Understanding one's financial situation, exploring suitable loan options, and being aware of the terms and conditions are crucial steps in successfully consolidating debt.

What is Debt Consolidation: How It Works in Canada | Amex CA (2024)


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