Lesson 31 - To consolidate or not to consolidate

Consolidating your debt is a question that I get asked often. I don’t have a generic answer on this as everyone is different but it is a topic I am quite passionate about!

Sometimes when we have a lot of debt the answer most people will give you is to of course consolidate your debt.  

I am not most people. I have A LOT of questions I ask before I tell you if it is a good idea or not. 

Consolidating your debt is part of my “prince charming effect” theory. You may now know exactly what I am going to say!?

The prince charming effect is when we get it set in our mind that something bigger, better will rescue us from our financial burdens. This could be an inheritance, prince charming (aka being in a relationship with someone who will pay off your bills), the lottery etc. This fantasy that we have of something or someone solving our financial burdens. 

Does this sound familiar? 

So with consolidation it can feel like that, being rescued financially. OOF, I know it feels as bad to write it as it does to hear it out loud or read it. 

If you do not have a healthy relationship with your spending and practice sober spending (conscious, present, well thought out spending) then getting a loan consolidation won’t be what I recommend for you. 

The dopamine hit will come on HARD when we get approved for a consolidation loan and soon after you will be right back to where you were if you don’t get control of your spending. 

There is no lesson in consolidation, it is a way out, it is a problem that you think is being solved but then you go back to the same habits and the cycle keeps going and going and going….you get what I mean. 

My advice is always, wait 2-3 months and ensure that you don’t incur anymore debt and start new habits to get your spending in control before you actually get the consolidation loan. 

When it comes to the overall #’s, sure consolidation makes the most sense as you will be saving money on interest. If you are just going back to the same behaviours then it’s not actually changing anything. Sometimes it’s NOT about the money, we have to CHANGE behaviours to have consolidation loans be what is best for us. 

So many people I talk to get consolidation loans and have a loan payment and then add balances to credit cards again and then it feels like the never never plan. Going nowhere super fast and can’t keep up with all the payments. 

One thing to also consider when getting a consolidation loan is the choices that you have when you feel safe and ready enough to do it. There are so many choices and what is legit and what isn’t. 

In both the US and Canada there are loan consolidation places that are predatory with their interest rates. You can see rates up to 42% in some companies, this is a HUGE red flag. The playing field is constantly changing on who is offering what and it’s really hard to keep up with. There are so many online banks now that offer consolidation loans. If the interest rate is higher than you are paying now it is not the best idea. 

Overall here are things to keep top of mind when considering a consolidation loan: 

1. Interest Rates

• Are the interest rates on the consolidation loan lower than the rates on your current debts? If not, the loan might not save you money.

2. Loan Terms

• Will you be paying off the loan over a longer period? A lower monthly payment might sound good, but if you're paying it for years, you could end up paying more in interest overall.

3. Fees and Hidden Costs

• Check for origination fees, balance transfer fees, or early repayment penalties. Some loans have these extra costs, which can eat into your savings.

4. Impact on Credit Score

• A consolidation loan might improve your credit if you make payments on time, but opening a new loan could temporarily lower your credit score.

5. Behaviour Change

• Remember debt consolidation won’t fix spending habits. It’s important to address what got you into debt in the first place—without changing behaviours, you might end up with new debt on top of the consolidation loan. Don’t take part in the Prince Charming Effect.

6. Secured vs. Unsecured Loans

• Some consolidation loans require collateral (like your home or car), which means if you can’t make payments, you could lose that asset.

7. Monthly Spending Plan

• Will you actually be able to afford the new loan payments? Make sure the loan fits into your spending plan comfortably.

Remember, sometimes consolidation isn’t the first answer. Sometimes you need to ensure some habits and behaviours have to change before you do one. Your money will LOVE you for this! 

All the money love sent your way,

Linda Parmar
Financial Sobriety Expert