A debt consolidation loan is one way to help you get a handle on your debt. It helps you gather your debts in one place, adjust your loan term and possibly get a better interest rate. Find out if a debt consolidation loan is right for you in this guide.
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How does consolidating debt with a personal loan work?
A debt consolidation loan can help you roll your existing debts into one new fixed monthly repayment. The goal is that your new loan offers a lower interest rate and more favourable loan terms than all of you’re current debts.
When applying for a debt consolidation personal loan, you will need to select “debt consolidation” as the purpose on your application. The lender will transfer your approved funds into your bank account, which you then use to pay off your open debts — whether that’s credit card balances, bills or other loans. After paying off your debts, you’ll be left with one single loan to repay.
Debt Consolidation Loan Savings Calculator
Calculate how much you could save by consolidating your debt with a personal loan:
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.
Debt consolidation loan can be a good idea if you’re having trouble keeping up with multiple, high interest debts, like credit cards. If you can lock in a lower interest rate than you’re paying on your credit cards, than you could save money and pay off your debt faster. Having to make only one monthly payment can also be helpful if you tend to miss your payment deadlines.
You need to be careful that you don’t start building up credit again on those credit cards you just payed off with your new debt consolidation loan. If you do start using your credit cards again before paying off your consolidation loan, you could end up in even more debt then when you started. Making and sticking to a realistic budget can help you stay out of debt.
Pros and cons of using debt consolidation loans in Canada
One payment. Bundling together all of your debts into one place can relieve the hassle that comes with managing multiple monthly repayments.
Potential overall savings. When you consolidate to a loan with a lower APR, you can save money on unnecessary interest and fees across multiple loans.
Earlier payoff. Depending on your term and APR, you might find that you’re able to pay off your overall debt more quickly than by keeping them separate.
No intro period. Unlike balance transfer credit cards, debt consolidation loans don’t offer low or 0% introductory interest rate periods, which means you’ll incur interest immediately with a loan.
Temptation to spend. With your credit cards and general cash flow freed up, you could be tempted to shop, thereby increasing and extending your debt.
Does not eliminate debt. By consolidating your debt, you’re simply shifting existing balances to a new form — however it is one that can hopefully save you money and time.
Can I get a unsecured debt consolidation loan in Canada?
Yes, you can get an unsecured debt consolidation loan in Canada, but your interest rates will likely be much higher than with a secured loan. Because an unsecured debt consolidation loan doesn’t require any collateral to secure it, lenders consider the loan much riskier since they could end up with nothing if you default. To compensate for that risk, lenders tend to charge high interest rates.
That’s why it’s important to make sure the interest rate on the unsecured consolidation loan is lower than what you’re currently paying, or it may not be worth worth consolidating your debt.
When finding the right debt consolidation loan for your financial situation, it’s important to compare a variety of different loans and lenders. Consider the following factors:
APR. Interest rates and fees combine to show you the annual percentage rate of your loan, which is the true cost of your loan. Compare a variety of loan APR’s to see how much you could save over time by paying different rates and fees.
Loan amounts. Bundling together your debts is part of the appeal of debt consolidation, since you’ll be able to make one single monthly repayment instead of multiple payments. Find a lender who is willing to offer you the amount you need in order to bundle all of your debts together.
Fees. Origination fees, early repayment penalties, late and returned payment fees — these can all eat away at how much you can save when moving your debts to one single loan. Compare the fees offered by lenders and see if you can negotiate out of any.
Repayment term. How long you take to repay your loan will affect your monthly payment and the total cost of your loan. A longer term generally results in lower monthly repayments, but a higher loan cost.
Borrower reviews. Reviews can help you evaluate a provider’s marketing and customer service against real-life customer experiences, providing insight into what you can expect from a lender.
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 with your existing loans.
While some debt consolidation loans come with origination fees — usually 1% to 5% of your loan amount that’s often deducted before you receive the money — it’s possible to find a consolidation loan offering no upfront fees.
When weighing consolidation loans, your APR and monthly repayments are two other costs to consider. Typically, you need to have excellent credit and a low debt-to-income ratio to qualify for the lowest APRs that range from 4% to 12%.
You might be concerned about immediate costs. If this is the case, a loan with a longer loan term could meet your needs. You’ll end up paying more over the life of your loan, because your interest accumulates over a longer term. However, your monthly repayments can be significantly lower than with a shorter term.
How much could you save with a debt consolidation loan?
Let’s imagine you’re carrying low interest rate loan and 2 credit cards — one that you’ve nearly maxed out to pay emergency bills and another filled with general spending. With a new job and a determination to get your debt under control, you decide to look into a debt consolidation loan.
Credit card 1
Credit card 2
Total before consolidation
Amounts after consolidation
Total interest payed
You would save $661.90 by consolidating your debt to a 3-year term personal loan offering a fixed 9% APR.
5 tips to get a low interest rate on a debt consolidation loan
Consider these tips to get a better rate when consolidating your debt with a loan:
Shop around. Don’t just look at local banks. Online lenders can offer lower rates, faster application processing and even peer-to-peer lending opportunities. Don’t limit yourself to only the online world or companies with physical locations.
Know your credit score and review your credit report. Generally, you need a credit score of 650 or higher to get a good deal on a loan. Check your credit report to make sure there aren’t errors that are hurting your credit score.
Pay down your debt. Try to keep your debt-to-income ratio under 20% to get the best rates and terms. Lenders will generally not give out loans to borrowers who have a DTI of 43% or higher.
Get preapproved. Preapproval allows you to see how much you can borrow and approximate your interest rate before committing to an offer. It’s also a good way to make sure you meet a lender’s eligibility requirements.
Apply only for what you need. Asking for more than you need can land you with a higher APR and will increase the cost of your loan, since you’ll pay interest on the amount you borrow.
Balance transfer credit card vs. debt consolidation loan
Balance transfer credit cards can offer exciting perks, like 0% or low interest for a specified number of months on transferred balances. However, once the intro period is up, you’ll face a higher revert APR.
Here’s how balance transfer credit cards compare to debt consolidation loans.
Balance transfer credit card
Debt consolidation loan
Low or 0% interest on transferred debt within an intro period, and typically 12.99% to 36% thereafter.
As low as 3% APR throughout your full loan term.
Intro periods can range from 3 to 12 months, sometimes longer, after which your APR reverts to a higher purchase rate.
Generally 3 to 7 years.
Typically 1% to 5% of each transferred balance.
Typically no upfront fees, though lenders may charge origination fees of 1% to 5% of the loan amount.
Impact on credit score
Short-term drop in score due to hard pull on credit to approve you for the credit card. Potential increase in credit score over time if you keep your other cards open to maintain low credit utilization ratio.
Short-term drop in score due to hard pull on credit to approve you for the loan. Likely to increase credit score in the long run, because other credit balances are paid off with the loan.
Summing it up: Which is better?
A balance transfer credit card is better when…
you’re certain you’ll pay off your consolidated balance within the introductory interest rate period.
A debt consolidation loan is better when…
you need more time, because the interest rate stays consistently lower over the long run.
A personal loan could help you consolidate multiple debts into one single monthly repayment — potentially one with lower rates and fees or shorter terms than you’re paying now. Before you apply for a loan, compare multiple lenders to find one that works best for your financial situation.
It depends on your credit profile and eligibility. Lenders look at your total existing debt, your overall creditworthiness and even the type of credit accounts you hold when considering your approved loan amount, rates and terms.
Many lenders allow you to get pre-approved for a loan without doing a hard pull on your credit score, allowing you the chance to see potential offers without knocking your credit score.
If your debt totals more than $35,000, you may have trouble finding a loan to consolidate your debt into one place. Some lenders offer up to $100,000, however it may be harder to find this loan amount.
As a tool, yes. It comes down to finding a legitimate lender.
You’ll find many reputable lenders offering debt consolidation. Look for privacy and security policies on a lender’s website, and read user reviews to get a feel for any lenders you’re considering.
Low credit doesn’t necessarily stop you from getting a debt consolidation loan. Certain lenders offer bad credit personal loans, but you likely won’t be eligible for the best rates unless you have a good to excellent credit score.
It might. Your current APR, monthly repayments and total interest can decrease with the right debt consolidation loan — ultimately saving you money.
However, these loans are often in terms of three to seven years. This may be longer than it would take to pay off one or more of your individual debts. Even if it is, it’s worth considering the amount of money you’d save and the convenience of having your debt in one place before ruling out a debt consolidation loan.
Rhys Subitch is a writer and editor at Finder who tackles topics across the site. With half a decade of experience researching, editing and writing for a Fortune 500 company, university and several independent publications, Rhys brings readers the most up-to-date and curated info on all things finance.
About half of Canadians, or around 18 million, carry a balance on their credit card. 10.5 million of these Canadians are stressed about their pandemic debt. Find out who has the most debt stress and what they are willing to do about it.
Secured credit cards could be an option. But you could qualify for an unsecured card if you lower your debt.
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