indicatorCredit and Debt

Why consolidate debt?

By ATB Financial 8 February 2024 3 min read

For most Albertans, debt is simply a financial reality. In 2023, the average Albertan carried $24,439 of consumer debt—that is, non-mortage debt in the form of credit cards, lines of credit, vehicle financing, student loans and other personal loans. While an Equifax report from September 2023 indicates that average consumer debt in Alberta is shrinking faster than in any other province, decreasing 2.46 per cent between 2022 and 2023,  Albertans still owe about $3,300 more per person than the average Canadian.

Like many Albertans, you may be borrowing from several different lenders—for instance, one or more credit card companies, your car loan provider and your bank. These lenders are almost certainly charging you different interest rates, ranging from a manageable few per cent to rates of 20 per cent or more. If you’ve ever wondered how to avoid paying such high interest on some of the debt you carry, you may want to consider debt consolidation. 

 

What is debt consolidation?

Debt consolidation is a debt management strategy that involves borrowing money from one lower-interest lender to pay off your debts with other, higher-interest lenders. In theory, debt consolidation allows you to clear higher-interest debts, combining the amounts you previously owed to many different lenders into one easy-to-track, lower-interest loan.‚Äč

 

Why consolidate?

While you may be resistant to the idea of taking out another loan,  there are two good reasons to consolidate your debts:

1. Pay less interest and get out of debt faster

High-interest debt is notoriously difficult to pay off, often decreasing very slowly because borrowers can only afford to keep up with interest payments—or worse, actually increasing as unpaid interest builds up. If you carry $10,000 in credit card debt with an 18.5 per cent interest rate and you make only the minimum payments of, say, $200 per month, only $46 of each payment is actually reducing your credit card balance—the other $154 is going towards interest. If this pattern persists you'll end up paying $9,261 in interest over eight years, while only reducing your balance by $4,416.

If, on the other hand, you choose to consolidate your debt, you could take out a $10,000 loan with a 9.5 per cent interest rate and use that loan to completely pay off your credit card. Sticking with your $200 payments, you could be debt-free in a little over five years, paying about $2,700 in total interest.

Calculate the potential benefits of debt consolidation with this tool from the Financial Consumer Agency of Canada.

 

2. Simplify your payments and planning

Simplification is built into the process of debt consolidation. When you consolidate your debt, the financial institution that issues your lower-interest loan usually requires you to close any debts you hold with other financial institutions. 

If you've built up debt with a few different lenders, you may have experienced how inconvenient and unintuitive it can be to stay on top of your payment due dates and track your repayment progress. By consolidating your debts, you'll have only one loan to make payments on and one number to track, making it easier to see your total financial picture and possibly even motivating you to pay down your debt faster.

 

Before you consolidate your debts

Before you consolidate your debts, you should have a clear understanding of your spending patterns and a strategy for covering your expenses without resorting to credit cards or high-interest loans. A lower-interest loan may help you pay off your existing debt, but if you find yourself unable to avoid incurring new debt, the loan you took out to consolidate your original debt will only add to your growing mental and financial stress.

 

Used wisely, consolidation is a powerful tool for managing and decreasing your existing debt ideally saving you thousands in interest and years of stress. Interested in getting started? Follow these 6 debt consolidating steps or visit your local branch to speak with an expert who can work with you to assess your current financial situation and create a strategy for reaching your goals.

You might be interested in

Need help?

Our Client Care team will be happy to assist.