Consolidate debt? No way!

At my company, The Money Finder, we don’t use the term “consolidation” when talking about your debts. It’s an accurate description of what happens when you combine debts, but there are too many negative preconceptions attached to the term.

As such, we drop that word from our vocabulary when proposing you change your debt structure during the cash flow planning process.

Debt consolidation refers to a situation where you take out one single loan to pay off many existing loans. You may lower your interest rate or secure a fixed interest rate by doing so, as well as lower the monthly cost of your debt servicing.

The latter result is the real driving force behind consolidation for many people. The problem, though, is paying lower debt costs each month can cause more long-term pain.

That’s because you would likely have to stretch the terms or amortizations of your loans to get lower monthly payments. And doing that ends up boosting total interest costs over the lifetimes of loans. As well, you wouldn’t be inspired to change your spending behaviours when only focused on lowering short-term costs.

As such, many people who consolidate debts end up boomeranging right back. Some even need to consolidate repeatedly, which places them on an endless debt treadmill.

That can happen to anyone. Some people decide to combine debts to simply free up cash flow. Some are lured by the prospect of lower interest rates. However, without a cash flow plan that helps you track repayment goals and use savings effectively, debt consolidation won’t have much of a long-term impact.

We prefer to use the term “debt unification” during cash flow planning discussions, especially since people don’t have preconceived notions of what that term means. We explain that, when unifying debts, our aim is to combine all consumer or personal debts into as few accounts as possible, and to help you pay back debt as quickly as possible.

Ideally, we like to combine all debts into a single account, but we first consider all repayment factors. If moving to one account is the best option, we’re then able to focus repayment efforts on that single account in an automated fashion. Also, we track your repayment progress based on your written cash flow plan.

Your main goals: Pay down principal as quickly as possible, save thousands in overall total interest costs and free up monthly cash flow.

Do you see the difference between consolidation and unification?

Do more than chase lower monthly debt payments. Ask your advisor for a detailed cash flow plan and use debt unification to meet your goals as efficiently as possible.

Stephanie Holmes-Winton is a Halifax-based financial services educator and speaker.