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What are the pros and cons of debt consolidation?

While a debt consolidation loan can help you save your finances, it won't fix harmful habits like overspending.

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Debt consolidation can help you save in the short and long term. But pick the wrong lender or consolidate at the wrong time and it could actually end up costing you more. The type of debt consolidation you go with can also affect how much you benefit.

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.

Fixed vs. variable rates: Which should you choose?

Change creditors

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.

Potential fees

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.

Less flexibility

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.

Compare debt consolidation loans

Name Product Interest Rate Max. Loan Amount Loan Term Fees Min. Credit Score Link
Loans Canada Debt Consolidation Loan
Secured from 2.00%, Unsecured from 8.00% to 46.96%
$50,000
3-60 months
No application or origination fees
300
Go to site
More Info
LoanConnect Personal Loan
Secured from 1.90%, Unsecured from 10.00%-46.96%
$50,000
3-60 months
No application or origination fees
N/A
Go to site
More Info
LoanConnect is an online broker that matches borrowers to lenders offering loans in amounts from $500 to $50,000. Get approved for multiple loan offers from different lenders in as little as 60 seconds with any credit score.
Fairstone Debt Consolidation Loan
19.99% - 39.99%. Varies by loan type and province
$35,000
6 months - 10 years
None
560
Go to site
More Info
Consolidate your debt up to $20,000 for an unsecured loan and $35,000 for a secured loan.
Marble Fast-Track Loan
19.44% – 31.90%
$20,000
36-84 months
Legal and admin fees of $295 - $1,500 (based on size of loan)
300
Go to site
More Info
Marble Financial offer credit builder loans in amounts from $5,000 to $20,000. Improve your financial health within 36 months. This loan is strictly for borrowers exiting a consumer proposal.
Magical Credit Personal Loan
19.99% - 46.80%
$20,000
6 months - 5 years
A single administration fee of $194 for $1,500 loans and up
300
Go to site
More Info
Magical Credit offers unsecured personal loans in amounts up to $20,000.
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Compare up to 4 providers

Pros and cons of different types of debt consolidation

Which type of debt consolidation you choose can affect how much you save — and whether it’s a good move.

Unsecured personal loan

Also known as a debt consolidation 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%.

Pros
  • Won’t lose any assets
  • Lower monthly cost with a longer term
Cons
  • Pay more in interest with a longer term
  • Potential origination fee
  • Good to excellent credit required

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.

Pros
  • Lower rates with mediocre credit
  • Easier to qualify for
Cons
  • Risk losing assets
  • Not as many options as an unsecured loan

    Balance transfer credit card

    This allows you to move other credit balances into one new credit card. The main draw is that it often comes with a low promotional introductory rate for around the first 3 to 6 months.

    Pros
    • Low-interest intro period
    • Combine multiple credit card balances into one
    • Gives you a debt payment deadline
    Cons
    • High APR after promotional period compared to loans
    • Potentially high monthly cost for large amounts of debt
    • Balance transfer fee

    Home equity loans and HELOCs

    Home equity loans and lines of credit (HELOCs) are secured loans that use your home as collateral. They offer some of the lowest rates out there, but you risk losing your home should you default.

    Pros
    • Lower rates by securing the loan with your house
    • Good credit not required
    • Fixed and variable rates available
    Cons
    • Risk losing home if you default
    • Must already have a mortgage
    • Expect to pay fees of around 2% to 5% in fees

      Student loan refinancing

      Student loan refinancing is the closest thing to debt consolidation for student loans. Most of the time, it may not make sense to refinance a student loan given the low interest rates that typically come with this form of debt. If you decide to use a personal loan to refinance your student debt, you could get rates anywhere between 5% and 47% (depending on your credit history) with terms between 1 and 7 years. Doing this only make senses if you can qualify for a very low rate.

      Pros
      • Save on interest with a lower rate
      • Cut monthly cost with lower rate or longer term
      • Switch companies that handles repayments
      Cons
      • Good to excellent credit required
      • Lose benefits on government loans (such as repayment assistance plans)
      • Hard to qualify if you have a high DTI

        Bottom line

        Debt consolidation can be helpful if you generally have strong finances but want to better manage your debt payments. Learn more about how it works by reading our guide to debt consolidation. Or if you don’t think it’s right for you, consider one of these other ways to manage your debt.

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