With the average Canadian household in 2020 owing $1.71 for every $1 of disposable income, it’s no wonder Canadians are looking for ways to better manage their debt. And debt consolidation might be the right next step – putting all your debt in one place and helping you save on interest. Keep reading to learn how debt consolidation works, what your debt consolidation options are and how to decide if it’s the right option for you.
What is debt consolidation?
Debt consolidation is a way to combine multiple debts into one single debt. Consolidating debt is often done to lock in lower interest rates, save money and pay off your debt faster. It also makes budgeting simpler since you just have to make one monthly repayment to a single company instead having to pay multiple bills.
Consolidating debt can be a good option if you’re carrying multiple different debts with relatively high interest rates. People often consolidate credit card debt since credit cards typically have high interest rates and credit limits in the thousands. You can save a lot of money over time by paying one low interest loan rather than paying down the balance on several different cards.
How to consolidate my debt? Here are 8 options
There are many debt consolidation options on the market. Choosing the right one for your needs will depend on how much debt you have, what kinds of debt you have and what you’re eligible for. Keep reading to learn your 8 debt consolidation options:
One of the most common ways to combine your debt is to take out a debt consolidation loan. With this method, you take out a loan in the amount of your total debt, and use that loan to pay off your current lenders. The debt consolidation loan you get often has a lower interest rate than your other debts, so you can pay more on your principle and less in interest. These loans also sometimes come with a longer term, which lowers your monthly repayments. Debt consolidation loans allow you to save money while focusing on paying down your debt.
Debt consolidation loans are usually secured or unsecured personal loans. If you can secure your loan against the value of an asset like your home, car or a certificate of deposit, you can lock in an even lower interest rate.
Compare debt consolidation loan options
We’ve curated a list in the table below of Canadian providers offering debt consolidation loans. You can compare the side-by-side features of multiple loan providers you’re interested in by checking the “Compare” box beneath each option.
Debt Consolidation Savings Calculator
Calculate how much you could save by consolidating your debt
You currently have a total debt balance of $ with an average rate of %. By consolidating them into a new loan at 9% APR with a -year term, you’d pay approximately $ per month. Your estimated total savings would be .
Your total monthly payments is not enough to cover the interest. Your loan(s) will never be paid off.
Pros and cons of an unsecured personal loan
An unsecured personal loan doesn’t require any collateral. This option typically allows you to pay off your debt over a period of 1-7 years at rates from 5% to 46%.
Won’t lose any assets
Lower monthly cost with a longer term
Pay more in interest with a longer term
Potential origination fee
Good to excellent credit required
Pros and cons of a secured personal loan
These personal loans require collateral — usually a savings account, Guaranteed Investment Certificate (GIC) or other asset with monetary value that your lender can take if you don’t repay the loan. They come with similar rates and terms as a debt consolidation loan. But the collateral offsets the risk for the lender, helping you qualify for a better deal.
Lower rates with mediocre credit
Easier to qualify for
Risk losing assets
Not as many options as an unsecured loan
2. Balance transfer credit card
For people with a smaller amount of debt who can manage to pay it off quickly, a balance transfer credit card might be a good option. With this method, you can move balances from multiple credit cards onto one single new card with a low introductory annual percentage rate (APR) that typically lasts anywhere between 6 to 10 months, or sometimes longer.
Balance transfer credit cards aren’t just limited to credit card debt – you can use one to pay off nearly any type of debt, including personal loans, car loans and more.
Low-interest intro period
Combine multiple credit card balances into one
Gives you a debt payment deadline
High APR after promotional period compared to loans
Potentially high monthly cost for large amounts of debt
Balance transfer fee
Compare balance transfer credit cards
Browse through the balance transfer credit cards in the table below. Once you’ve decided on a card, click the “Go to Site” button to apply.
3. Debt relief company
With a debt relief company, you’ll get access to information, tools and resources to help you get out of debt. These tools and resources may include debt calculators and introductions to your debt relief options like consumer proposals, debt settlement and debt consolidation. These types of companies aim to help people in debt learn more about their debt relief options before making the best decision for them to move forward.
A typical line of credit works by giving you a specified credit limit to use however you like. The main difference between a line of credit and a credit card is that the limit is usually higher, while the rates are typically lower than credit cards. You can access any amount up to your credit limit, and once you pay it back, you can re-access the money. Interest is usually only charged on the funds you actually withdraw. These are generally more challenging to qualify for than other types of debt consolidation loans, unless you can secure your line of credit with some an asset like your car, home or a certificate of deposit.
Apply once to get ongoing funding
Options available to those with good or bad credit
Secured or unsecured line of credit available
Annual or monthly service fee may apply
High interest rates for those with bad credit
Interest rate can change if you choose variable option
A home equity line of credit is a secured line of credit that allows you to borrow money against the equity in your property – up to 65% of your home’s value. You only pay interest on the amount you actually borrow, and you can pay off the outstanding balance on a flexible basis. Because your property acts as collateral for the line of credit, you’ll usually get lower interest rates.
If your main sources of debt are student loans, you can use a lender that specializes in student loans to refinance your student loan or consolidate your student loans. These types of loans work similarly to the consolidation loans discussed above, but also includes options like getting a guarantor loan. With a guarantor loan, you get a someone, usually a family member, with a higher income and better credit history to cosign on a consolidation loan with you. That helps you get a lower interest rate and higher loan amount than you otherwise could on your own merits.
Save on interest with a lower rate
Cut monthly cost with lower rate or longer term
Switch companies that handles repayments
Good to excellent credit required for refinancing
Lose benefits on government loans (such as repayment assistance plans)
Another option is to borrow the money you need from family or even friends to pay off your debt. While this may seem like the most convenient option, it should actually be a last resort. It’s usually best to keep finances separate from your relationships just to keep your relationships intact.
Let’s imagine you take a loan from a family member to consolidate your debt, and then get let go from your job. Not paying back your loan could put a strain on your relationship, and put your family member in an uncomfortable situation when they have to ask you to pay back the loan. If you do decide to borrow from a family or friend to consolidate your debt, make sure to have open and upfront conversations about how and when you’re going to pay back the loan.
Borrow from a trusted person
Negotiate for a low interest rate and favourable loan term
No credit check required
Can put a strain on the relationship
CRA tax rules may apply
8. File a consumer proposal
Filling a consumer proposal should be a last resort. A consumer proposal is an agreement negotiated by a government-licensed insolvency trustee between you and your creditors. Creditors agree to lower your payments or extend the terms of your loans instead of garnishing your wages or assets. They may even forgive a portion of your debt. Proposal payments are also interest-free and can be spread out over a maximum of 5 years.
The downside of the agreement is that your credit score will be knocked down to one of the lowest possible ratings. And once you’ve paid off your consumer proposal, a note that you had a consumer proposal will stay in your credit history for 3 more years.
Keep your asset
More manageable payments and payments are predictable
There are generally 5 steps to the debt consolidation process:
Figure out how much you owe and how much you can afford to pay each month.
Compare lenders and credit cards.
Apply for a new loan or credit card.
Use those new funds to pay off all other accounts you’d like to consolidate.
Pay off your current loan or credit cards according to the new terms and conditions.
Creditors are generally willing to work with you on consolidating your debt because it means that they are guaranteed to get payed. That’s also the reason why it’s worth contacting your current lenders before you begin the debt consolidation process to ask for lower interest rates or more affordable monthly payment plans.
How to request a lower interest rate
To request a lower rate, call your lender. Make sure you’re speaking to someone who can actually give you a lower interest rate, usually by asking to speak to a supervisor. Make an argument for yourself: Be sure to point out how much business they would lose if you were to consolidate your loan with another institution. If your call is a success, your lender will review your credit and payment history and come back to you with lower interest rate.
What types of debt can I consolidate?
Understanding what types of debt you can consolidate is the first step toward deciding which options you might want to consider, if any at all. People generally consolidate these kinds of debts:
Credit card debt. If you have more than one credit card, you will have to keep track of the debts you have on each one and pay off a number of different balances each month, which can be frustrating and overwhelming. Many credit cards also charge noticeably high APRs, meaning you pay unnecessarily high interest on your debt.
Personal loans. If you have multiple personal loans, you can think about bringing them under a single loan. Depending on your existing financial situation and credit score, you may qualify for a more competitive interest rate on a debt consolidation loan.
Student loans. You can consolidate your student loans into one single loan. If you have debt from university or college, you also might want to look into refinancing – it often comes with a consolidation option.
Business loan debt. Some business lenders offer debt consolidation loans as well to help you improve your cash flow by simplifying multiple payments into one.
Retail credit cards. The discounts and rewards can be great from retailer cards, however, if you have too many it can be difficult to keep track of what you owe and which payments to prioritize.
Tax debt.If you owe taxes to the CRA from previous years or can’t afford to pay this year’s, you can consider taking out a personal loan to pay them off instead of taking on an installment agreement. Loans tend to have more flexible terms than installment agreements and if you have good credit, interest could be a lot more affordable.
Consolidating debt can be helpful for some people, but it’s not a silver bullet. Consider these risks before you sign up
Opportunity to get into more debt. If you’re in debt because of spending habits, consolidating your debt won’t help unless you also take steps to cut back. In fact, it can make it worse by freeing up room on your credit cards for you to spend on again. If you are going to break the cycle of debt, consolidating your debt only works best if you make a budget realistic monthly budget you can stick to.
Might increase interest cost. Taking out a loan with a long term to reduce your monthly debt payments means there’s more time for interest to add up.
Unhelpful with large amounts of debt. If you owe more than half of what you make in a year, you might not qualify for a loan or balance transfer credit card.
Pros of debt consolidation
From lowering your monthly payments to saving on interest — or both — here are a few benefits of consolidating your debt:
Lower your interest rate
If your credit has improved since you took out your loan, there’s a chance you could qualify for a lower rate by consolidating. Even if your credit score hasn’t improved, a personal loan may be able to give you a lower rate if you’re struggling with credit card debt. That’s because personal loans typically come with lower interest rates than credit cards.
Lower your monthly cost
When loan repayments are stretching your budget thin, consolidating for a longer term will lower the amount you owe each month. This can help you avoid becoming delinquent or defaulting.
Combine multiple payments into one
Rather than keeping track of multiple repayments, debt consolidation allows you to move everything into one. This can make it easier to manage your spending and create a budget.
Switch to a fixed or variable rate
Not only does debt consolidation let you change your interest rate — you can also change the type of interest rate you have.
If you currently have fixed payments but think the market can give you even lower variable rates, you can consolidate with a variable-rate loan or credit card. Or if you’d rather have one reliable cost each month, you can consolidate with a fixed-rate loan.
Not happy with your lender or credit card company? Debt consolidation offers an opportunity to gracefully part ways before your account is fully paid off.
It might improve your credit
A debt consolidation loan can help you maintain a record of on-time repayments — especially if you consolidate with a longer term to lower your monthly cost.
Gives your debt an end date
Consolidating credit card debt with a personal loan helps you commit to a debt repayment plan. Sometimes seeing a light at the end of the tunnel can give you the motivation to get other parts of your personal finances back on track.
Cons of debt consolidation
Debt consolidation isn’t right for everyone. And there are a few costs and risks you should consider before diving in head first.
You could pay more in interest
There’s a chance you won’t qualify for a lower rate. And even if you do, applying for a longer term means there’s more time for interest to add up. In this case, consolidation could cost you more in the long run.
Debt consolidation can come with several fees, which might cancel out any savings.
Origination fee. Many personal loan providers charge an origination fee of up to 5% of your loan amount, which they often roll into your balance.
Prepayment penalty. Your current creditors might also charge a penalty for paying off your loan ahead of time. It’s meant to make up for the interest they would have earned if you stuck to the original term.
Balance transfer fee. If you opt to move your credit card debt to another card, you’ll likely have to pay a fee of around 1% to 3% of each balance you transfer.
It could dig you deeper into debt
Debt consolidation won’t fix long-term overspending or prepare you for an emergency. If you don’t combine it with an effort to curb spending or build an emergency fund, you could find yourself in a hole that you won’t be able to consolidate your way out of. Having too much debt can make it difficult to stay on top of repayments and damage your credit.
Low DTI required for most options
You might not be able to qualify for debt consolidation at all if you have a high debt-to-income (DTI) ratio. If you owe more than 43% of your salary before taxes each month, you likely won’t qualify at all. Having a high DTI can also make it difficult to qualify for competitive rates.
Moving all of your debt into one place means you don’t get to prioritize if you aren’t able to afford your full repayments. Debt consolidation gives you one all-or-nothing payment. And if you consolidate credit card debt with a loan, you won’t have the flexibility of those minimum monthly payments to rely on when money gets tight.
How much will a debt consolidation loan cost me?
Ideally, a debt consolidation loan won’t cost you anything you weren’t already going to pay in interest. While some debt consolidation loans come with origination fees – usually 1-5% of your total loan that’s deducted before you receive the money – it’s possible to find a consolidation loan without any upfront fees.
You also need to pay attention to the consolidation loan’s APR and monthly repayments. Typically, you need to have excellent credit and a low debt-to-income ratio to qualify for the lowest APRs that are usually between 5% and 10%.
Depending on which type of debt consolidation you choose, consolidating your debt can affect your credit score in these 2 ways:
Your credit score can go down. Your credit score can go down when you initially sign up for debt consolidation. This is a common outcome when a creditor does a hard pull on your credit or you take on new or “immature” debts. Once you start making payments on a consistent basis, you should see your score start to climb.
Your credit score can go up. Your credit score will typically start to go up after a few months or years of making on-time and consistent payments. Just be aware that you’ll lose any progress you make on your credit score if you fall behind on your repayments.
Consolidating your debt when you have a bad credit score with bad credit can be tricky to overcome, but not impossible. You might have to go off the beaten path to find a consolidation method that helps your financial situation more than it will hurt it. Here are just a few of your options:
Peer-to-peer lenders. Although these lending services have credit score cutoffs, they tend to be lower than what you’ll find at a bank.
Debt settlement. Sign up to have a debt relief company negotiate down your balance in exchange for a one-time payment.
Bankruptcy. Best saved as a last resort, you can file for Chapter 11 or 13 bankruptcy to have a judge either eliminate or reduce the amount you owe to your creditors.
It’s always best to assess your finances and contact your creditors before looking into debt consolidation alternatives. If you’ve been rejected for debt consolidation, find out why before you turn to alternatives. You might be able to qualify in the near future by paying off your debts or taking steps to boost your credit score.
Debt consolidation can be a great option if you’re looking for lower rates or more manageable repayments. If that’s the case, you can learn more about how to apply and what to expect by reading our guide to personal loans.
No, a legitimate lender should not ask you to pay any funds upfront. In many provinces, it is actually illegal for a lender to request any money upfront. If a lender charges an origination or processing fee for a loan, they will typically deduct it from the loan amount. If a lender is asking for a prepaid card loaded with funds or for you to pay loan insurance, you should look elsewhere for a loan – it’s likely a scam. You should also be aware that loan insurance is never required.
Some lenders provide debt consolidation loans to individuals with less than perfect credit. In these cases, the APR you qualify for may not be as low as it is for someone with better credit. One option to consider is getting an installment loan. These loans tend to come with more lenient eligibility criteria, and some may offer amounts high enough to consolidate your debt.
No. You can only transfer your existing debts to new loans that you take out in your own name.
Most likely, yes. Many lenders offer loans with no prepayment penalties. If you’re interested in that benefit, be sure to check that the lender you’re considering offers it. If not, you may end up paying a penalty for paying your loans back quicker.
The first and most important thing is to stop taking on new debt outside of debt consolidation. This means avoiding loans, but also curbing your credit card spending to only what you absolutely need. Go over your spending habits and be honest about what you really need. It’s okay to keep a few luxuries in your life if they aren’t incredibly expensive and you actually use them. After you’ve cut your spending down to a manageable amount, make room in your budget to put aside some cash to start saving. Treat your monthly repayments and paying off more than your minimum credit card payment as a big priority.
The lender providing your debt consolidation loan will conduct a hard check on your credit, which will temporarily lower your score. Plus, you could hurt your score if you fail to make repayments on time. On the other hand, if you make repayments on time and discharge the loan by the end of the term, it could help your credit score, because it shows lenders that you can be relied upon to repay your debt. Learn more in our guide to how debt consolidation affects your credit score.
Not necessarily. Debt consolidation can be a great way to manage debt and even save on interest. But it won’t help if you’re struggling with overspending and don’t make any changes to your habits.
You can — though you might need to pay down some of your balance first. You might have trouble qualifying for a mortgage if there’s no room in your monthly budget for another set of repayments.
Chelsey Hurst is an associate editor at Finder. She loves empowering people to avoid financial pitfalls and make better decisions with their money. Chelsey has a Bachelor of Science from Redeemer University, a Master of Science from McMaster University, and has won multiple awards for research communication. In her spare time, Chelsey enjoys cooking and taking long walks in nature.
Learn the difference between two popular debt elimination strategies and figure out which will keep you focused enough to reach financial freedom.
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