Debt consolidation loans in Canada let you combine your multiple debts into 1 loan with a lower interest rate. This loan pays off your outstanding debts so you’re left with just 1 payment to manage every month. By getting a low rate debt consolidation loan, you simplify your payment schedule and also save on interest.
Follow this guide to learn more about debt consolidation loans in Canada and where you can apply to get a low interest rate.
Compare debt consolidation rates in Canada
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Do I qualify for low rate debt consolidation loans?
You’ll usually need to meet the following criteria to get approved for debt consolidation loans in Canada at a competitive rate:
Be a Canadian citizen or permanent resident who is the age of majority in your province (usually 18 or 19 years old).
Have a credit score above 660.
Have a regular income.
Have a debt-to-income ratio (DTI) that’s under 35–40%.
What is debt-to-income ratio?
Debt-to-income ratio (DTI) is the percentage of your gross monthly income that goes towards your monthly debt payments such as rent/mortgage, car loan, student loan and credit card minimums. It does not include living expenses such as groceries, utility bills, cell phone bills and entertainment.
Pros and cons of a debt consolidation loan
Pros
Less stress. Bundling your debts together in 1 place can relieve the hassle that comes with managing multiple debt payments.
Save money. If you get a lower interest rate on your new debt consolidation loan, you’ll pay less interest.
Quicker to pay back. With a lower interest rate, you’ll be able to pay your debts back faster.
Cons
May come with added costs. You may need to pay origination or early repayment fees with certain debt consolidation loans, which could increase your loan cost.
Could stimulate further spending. You may be inclined to spend more than you should if you have extra room on your credit cards or more cash flow due to paying off debts.
When to apply for low interest debt consolidation loans
It could make sense to apply for a low rate debt consolidation loan in the following situations:
Your credit score is strong. A high credit score, especially if it falls under “very good” or “excellent”, can qualify you for low interest debt consolidation loans.
Your DTI has improved. If your income has gone up considerably or you recently paid off some debts, you may qualify for a low rate debt consolidation loan.
You’re struggling to keep up with monthly payments. You can consolidate your debts over a longer term if you want to bring your monthly payments down. You may end up paying more interest overall, but this gives breathing room in your monthly budget.
You’re struggling to keep up with many small debts. You may find it easier to manage a single loan payment instead of multiple smaller payments.
When to reconsider applying for low rate debt consolidation loans
You may want to reconsider applying for low rate debt consolidation loans in the following situations:
You have a bad credit score. Unfortunately, if you have a low credit score, lenders will not approve you for low interest debt consolidation loans.
You have too many debts. If you’re already shouldering too many debts that include secured loans, a lender may not approve you for a low rate debt consolidation loan.
You have a good relationship with your current lender. You may want to avoid switching to a new lender if your current lender gives you leniency with your debts.
You might default on repayments. It could make sense to explore other debt management options such as credit counselling or debt settlement if you risk defaulting on your consolidated loan.
Where can I apply for low interest debt consolidation loans?
You can find low rate debt consolidations among the following types of lenders:
Banks.Banks can offer low rate debt consolidation loans, but be prepared for strict eligibility requirements.
Credit unions.Credit unions offer low rate debt consolidation loans that are equal to or better than the banks. However, you’ll need to apply for a membership with the credit union.
Peer-to-peer lenders.An online peer-to-peer lending platform likegoPeercan reduce operating costs and pass on the savings to the borrower.
Online lenders.These lenders generally have higher rates than banks and credit unions, but there are select online lenders that can offer low interest debt consolidation loans that are on the same level or better than the traditional lenders.
Online broker.An online broker such as Loans Canada or LoanConnect can help you prequalify with multiple lenders within a few minutes of applying. This can help you filter to the lowest rates.
How to find the best debt consolidation loan in Canada
Consider the following factors when you browse debt consolidation loans in Canada:
APR. The annual percentage rate of the loan shows the total cost of borrowing (interest and fees to take out the loan). Compare several low rate debt consolidation loans to find the least expensive option.
Loan amounts. Find a lender who’s willing to lend you enough money so that you can pay off all of your outstanding debts at once.
Fees. Aim to borrow from lenders that don’t charge extra fees such as origination fees, early repayment penalties, late payment fees or NSF fees.
Term. Find a loan term that gives you monthly payments you can afford but is short enough to prevent you from paying unnecessary interest.
Eligibility requirements. Make sure you meet eligibility requirements such as age, residency, income and DTI requirements before you choose a loan.
Borrower reviews. Check a lender’s reviews to make sure it has a good reputation.
Steps to get a low rate debt consolidation loan
Fill out an application. Provide personal information such as your full name, address and phone number, along with information about your finances.
Get a decision. See if you’re pre-approved for a debt consolidation loan or denied.
Send documents. If you want to proceed, provide documents to the lender, such as bank statements and government-issued ID, so it can verify your income and identity.
Wait for approval. Wait to get an official loan offer. Once you receive your contract, review it carefully and sign.
Get funding. Your lender will typically pay off your creditors.
You can use debt consolidation loans to roll all of your existing debt into 1 easy-to-make payment. Your new loan may come with a longer term and/or lower payments, which can make your debt easier to manage. It should also come with a lower interest rate if you want to save money on the total cost of your debt over time.
Types of debt that you can consolidate
You can consolidate unsecured debt such as credit cards, utility bills, unsecured personal loans, unsecured lines of credit, student loans and payday loans.
Types of debt that you can’t consolidate
You generally can’t consolidate debt secured with collateral such as mortgages, car loans and home equity lines of credit.
Types of debt consolidation loans in Canada
There are several types of debt consolidation loans in Canada that you can take out to combine your debts:
Unsecured loans. You’ll usually need a good credit score (above 660) to qualify for unsecured debt consolidation loans. These loans typically come with higher interest rates than secured loans.
Secured loans. Secured debt consolidation loans require you to secure your loan against an asset. For example, a home equity loan lets you borrow against the equity in your home, but you risk losing your house if you can’t repay the debt.
Bad credit loans. You may be able to apply for bad credit debt consolidation loans if your credit score is below 600. Just be aware that these types of loans tend to come with very high interest rates and could leave you in a worse financial position overall.
Guarantor loans. If you can’t qualify for a bad credit loan, you may want to ask your family or friends to cosign a loan. Cosigned loans could help you get a better interest rate and you may qualify for a larger amount.
How much will a debt consolidation loan in Canada cost me?
You may need to pay early repayment penalties on your existing debts if that fee was included in your contract. Other than that, debt consolidation loans in Canada shouldn’t cost you extra as long as you get a lower interest rate and avoid lenders that charge you fees to take out the loan.
How much can I save with a debt consolidation loan?
You may be able to save hundreds or even thousands of dollars with a debt consolidation loan. The overall amount you save will depend on your debt load and personal circumstances.
Representative example: Tracking savings on a debt consolidation loan
Let’s say that you have 1 credit card and 2 personal loans to pay off over a span of 5 years. This is what your current debts might look like:
Feature
Personal loan 1
Personal loan 2
Credit card
Total for separate debts
Amount owing
$6,000
$4,600
$4,000
$14,600 left owing
APR (interest + fees)
16%
13%
19.99%
From 13% to 19.99%
Monthly payments
$145.91
$104.66
$105.95
$356.52 per month
Total interest over loan term
$2,754.50
$1,679.85
$2,357.20
$6,791.55 in interest over 5 years
Now we’ll put the total of your separate debts next to the total you’ll pay for a consolidated loan with 10% interest in the table below. You can compare them side by side to see how much money you’ll save by consolidating your debt.
Feature
Total for separate debts
Total for consolidated loan
Amount
$14,600 left owing
$14,600 left owing
APR
From 13% to 19.99%
10%
Payments
$356.52 per month
$310.21 per month
Total interest
$6,791.55 in interest over 5 years
$4,012.41 in interest over 5 years
As you can see, you’ll pay lower interest and get lower monthly payments if you consolidate your loans at a lower interest rate.
Tips to get a low rate debt consolidation loan
Consider these tips to get a low interest rate when consolidating your debt with a loan:
Shop around. Compare at least 3-4 lenders to find the one that will give you the cheapest rates. Look at loans from banks, online lenders and loan brokers.
Improve your credit score. Work on building your credit score and apply when your score increases (especially if it goes above 660).
Pay down your debt. Try to keep your debt-to-income ratio under 20% to get the best rates and terms.
Get pre-approved. Pre-qualify with multiple lenders to get an idea of which lenders will give you money you need at the lowest interest rates.
Secure your loan or get a cosigner. Use collateral to secure your loan or ask a cosigner with good credit to back your loan if you want to qualify for better rates.
Can I get a debt consolidation loan with bad credit?
You may be able to get online debt consolidation loans in Canada with bad credit, but you should expect to pay higher interest rates. In this case, you’ll want to find out how much you’re currently paying in interest on your loans. Make sure that you don’t end up with higher rates by consolidating your debt since this will increase your overall costs and add to your debt.
Snowball debt management plan. Pay off your smallest debt first, then roll those payments onto your next smallest debt to cut down on the number of loan payments you need to make.
Pay off highest interest debts first. Focus any extra funds you have onto your highest interest debts first to cut down on your overall costs (for example, pay off credit cards before putting extra money onto a lower interest loan).
Balance transfer credit card. Consolidate your credit card debt onto a balance transfer credit card to get a low interest introductory rate in your first 6 to 10 months so that you can put more of your money towards paying off your principal balance.
Debt relief. Consider looking at credit counseling services or a debt relief company to learn how to better manage your debt or lower your monthly payments. Just make sure the agency you work with is legitimate and won’t try to charge you extra fees.
Borrow money from family or friends. Consider asking your family or friends to give you a loan to consolidate your debt. You should only do this if you have the funds to pay them back and you aren’t worried about damaging the relationship if you run into issues.
Bankruptcy or insolvency. As a last resort, you can look into submitting a consumer proposal or filing for bankruptcy. Just be aware that these options can significantly damage your credit score and you should explore all other alternatives first.
Compare debt relief options
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Bottom line
Debt consolidation loans can help you consolidate multiple debts into one single monthly repayment, potentially with lower interest rates or monthly payments, and can help you get out of debt faster. Make sure you learn about how much you could save and what you need to apply before comparing your options and the alternatives you can explore if you don’t qualify for financing.
Frequently asked questions
Debt consolidation loans will only hurt your credit score if you don't pay them back on time. In most cases, they'll help to improve your credit score by making your payments more manageable. This will prevent you from missing payments, which will increase your overall score. Find out more about how debt consolidation affects your credit score.
To get approved for a low rate debt consolidation loan, you typically need a credit score above 660.
When you get a consolidation loan, you combine your existing debts into 1 loan with a lower interest rate. By doing so, you simplify your monthly payment schedule and save money on interest. Once you're approved for a debt consolidation loan, your lender will typically pay off your creditors. Then you're left with making 1 monthly payment to your lender.
That depends on what interest rates you get and how long your new term is. You'll save money and pay off your debts faster with lower interest rates. However, if you increase the length of your term to get lower monthly payments, you'll take longer to pay back your debts and you may pay more interest over time.
Claire Horwood is a writer at Finder, specializing in credit cards, loans and other financial products. She has a Bachelor of Arts in Gender Studies from the University of Victoria, and an Associate’s Degree in Science from Camosun College. Much of Claire’s coursework has focused on writing and statistics, with a healthy dose of social and cultural analysis mixed in for good measure. In her spare time, Claire enjoys rock climbing, travelling and drinking inordinate amounts of coffee.
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