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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.
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.
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.
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.
Calculate how much you could save by consolidating your debt
| Your current balances | ||
|---|---|---|
| 1) | Debt amount | Interest rate |
| 2) | Debt amount | Interest rate |
| 3) | Debt amount | Interest rate |
| Total monthly payments | ||
| Add another balance | ||
| New loan terms | ||
| Loan length in years | ||
or
| Before Consolidation | After Consolidation | |
|---|---|---|
| Balance | $ | $ |
| Interest rate | % | 9% |
| Year(s) to pay off | ~ | |
| Monthly payment | $ | $ |
| Total interest paid | ||
| Total balance paid |
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.
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%.
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.
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.
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.
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.
How debt relief companies work
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.
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.
Our guide to home equity lines of credit
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.
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.
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.
Our guide to consumer proposals
There are generally 5 steps to the debt consolidation process:
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.
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.
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:
Consolidating debt can be helpful for some people, but it’s not a silver bullet. Consider these risks before you sign up
From lowering your monthly payments to saving on interest — or both — here are a few benefits of consolidating your debt:
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.
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.
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.
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.
Fixed vs. variable rates: Which should you choose?
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.
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.
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.
Debt consolidation isn’t right for everyone. And there are a few costs and risks you should consider before diving in head first.
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.
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.
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.
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%.
Common misconceptions about debt consolidation
Depending on which type of debt consolidation you choose, consolidating your debt can affect your credit score in these 2 ways:
How debt consolidation affects your credit score
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:
If debt consolidation doesn’t seem like the best option for you, or if you’ve been denied a debt consolidation loan, consider one of these alternatives.
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.
Compare debt settlement vs. bankruptcy
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.
But it’s not ideal if you have poor credit. In that case, you might want to consider other debt relief options.
Learn the difference between two popular debt elimination strategies and figure out which will keep you focused enough to reach financial freedom.
