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Unsecured debt consolidation loans from 6.99%
Consolidate your debts into a single loan and make monthly repayments with a better interest rate.
If you’re trying to tackle your debts and pay them off faster but prefer not to put up any collateral, you may be looking into unsecured debt consolidation loans. To get approved for this loan, you’ll typically need a credit score above 580, but to get a competitive low rate, you’ll need good to excellent credit score above 660.
Use this guide to learn more about unsecured debt consolidation loans in Canada and where you can apply.
Compare unsecured debt consolidation loans
An unsecured debt consolidation loan combines your existing debts into 1 loan with a lower interest rate and with no collateral. The purpose of consolidating debt is to save money on interest, simplify your monthly payment schedule and pay off your debt faster.
Some lenders of unsecured debt consolidation loans offer you a choice between a fixed and variable interest rate:
- Fixed interest rate: Your interest rate will stay the same throughout its loan term.
- Variable interest rate: Your interest rate will fluctuate with the markets. If Canada’s central bank increases its rate, your rate will also increase; your payments will generally stay the same, but more will go towards paying interest than the principal. The opposite will happen if the central bank decreases its rate. Economists expect rate increases for the rest of 2022, so be prepared for your rate to increase if you get this type of debt consolidation loan now. Banks and credit unions are the main providers of variable rates for unsecured debt consolidation loans.
Types of debt you can consolidate
You can consolidate debts that are not secured with collateral, such as credit cards, unsecured personal loans, unsecured lines of credit, existing unsecured debt consolidation loans and payday loans.
Types of debt you can’t consolidate
You generally cannot consolidate debts that are secured with collateral, such as mortgages, car loans and secured lines of credit.
Am I eligible for unsecured debt consolidation loans?
While requirements vary among lenders, the basic requirements boil down to the following:
- Be at least 18 years old, or the age of majority in your province.
- Be a Canadian citizen or permanent resident.
- Have a regular income.
- Have a bank account.
- Have a debt-to-income ratio (DTI) no higher than 35–40%.
What is debt-to-income ratio (DTI)?
DTI is the percentage of your gross monthly income that goes towards your monthly debt payments. Examples of debt payments include car loans, rent/mortgage, student loans and credit card minimums. It does not include living expenses such as groceries, cell phone bills and entertainment.
Where can I find the best unsecured debt consolidation loans?
You have many choices for unsecured debt consolidation loans, especially if you have a strong credit score:
- Banks. These traditional financial institutions offer competitive rates. You can ask your current bank if it offers any rate discounts for existing customers.
- Credit unions. Credit unions offer rates that are equal to or better than banks. However, you’ll need to apply for membership to get an unsecured debt consolidation loan.
- Online lenders. These lenders have higher rates on average, but there are some that can offer better rates than the traditional lenders.
- P2P lenders. Rather than borrowing from an institution, you borrow anonymously from fellow Canadians. A P2P lending platform like goPeer can offer low rates because it does not have the same operating costs as brick-and-mortar lenders and can therefore pass on those savings to the borrower.
- Online brokers. By filling out 1 application, you get matched with multiple lenders, and from there you can filter to the best offers.
When does it make sense to get an unsecured debt consolidation loan?
It might make sense to apply for unsecured debt consolidation loans if the following applies to you:
- Your credit score is strong. If your credit is above 660 – or better yet, above 725 – and your current debts have high rates, such as credit cards, you can apply for an unsecured debt consolidation to get a lower rate.
- You don’t have a house or investments. Using these assets as collateral usually gets you the lowest rates when borrowing money, but if you don’t have these or you don’t want the risk of losing them, then it makes sense to apply for unsecured debt consolidation loans.
How do I find out my credit score?
If you’re not sure what your credit score is, you can get a free copy of your credit report from one of the credit bureaus Equifax or TransUnion. This is the true record of your financial history. If you’re pressed for time, there are lenders in Canada that give you free access to your credit score. Examples include RBC, Borrowell and Mogo.
When does it not make sense to apply for an unsecured debt consolidation loan?
There are some cases when you may not get approved for an unsecured debt consolidation loan:
- You have a low credit score. If you have a credit score below 660, you’ll have difficulty getting an unsecured debt consolidation loan at a favourable rate.
- You have low income. Lenders will want to see that you can manage your loan payments, and they do this by examining your income. If you have little to no income, lenders will likely not approve you for this loan.
- You have too many debts. If you already have debts like a car loan, mortgage, student loan, home equity loan, credit card debt and more, lenders may not approve you for unsecured debt consolidation loans. Lenders typically want to see that your monthly debts are no more than around 40% of your monthly income.
What are the interest rates for unsecured debt consolidation loans?
The interest rates for unsecured debt consolidation loans start at around 5.99%. To qualify for the best rate for an unsecured debt consolidation loan, you’ll need to be in a strong financial position. Lenders will want to see you have a solid history of on-time payments, enough income to take on the loan and not too many debts.
How to compare unsecured debt consolidation loans in Canada
- APR. The annual percentage rate (APR) tells you the true cost of your loan as it takes into account the interest rate and fees you will pay to get the consolidation loan. Comparing the APRs of different loans is better than comparing interest rates and fees separately, as it will help you find the best loan deal based on the true cost.
- Origination fees. While the APR will include any origination fees you must pay, it’s a good idea to look at this fee separately as well. Some lenders will not charge an origination fee, while others may charge a fee of 1-5% of your total loan amount. It’s possible that the benefits of a low interest rate could be offset by a high origination fee.
- Type of interest rate. Some lenders allow you to choose between a fixed and variable rate personal loan, both of which have their own pros and cons.
- Loan term. Loan terms typically sit between 6 and 60 months. Consider the amount of debt that you’re looking to consolidate and choose the shortest loan term that you can manage. A shorter loan term will result in paying less interest and therefore cutting the cost of your debt.
- Loan amounts. Many lenders set minimum and maximum loan amounts. Consider the total amount of debt you have and find out if it’s within a lender’s range.
- Eligibility requirements. Before applying for a loan, make sure you meet the eligibility requirements. The requirements vary among lenders, but the basic criteria such as age, residency and income minimums apply to most loans.
- Repayment flexibility. Find out if you’re able to pay off your loan early without facing penalties. You’ll also want to make sure you can make your loan repayments directly from your bank account without incurring any extra fees.
What to watch out for
- Origination fees. Debt consolidation loans may come with a fee between 1-5% of your total debt. Depending on the size of your debt, that can add a substantial cost upfront.
- Unfavourable rates or terms. If a lender offers you a higher interest rate than you’re paying now, or if there are other fees attached, it may not be worth consolidating your debt.
- Being dishonest about what you need the money for. Always be honest with a lender about the reason for the loan. If you’re denied by a lender, check with another.
- Getting into more debt. Don’t overreach. Asking for a loan larger than the sum of your debt could have you spending unnecessarily, accumulating more debt.
- Guaranteed approval or no credit check. Steer clear of lenders that offer this for unsecured debt consolidation loans. Lenders must examine your finances before approving you for a loan.
- Loan insurance. This is completely optional and will add to the cost of your loan if you get it.
How to apply online for unsecured debt consolidation loans
Follow these steps to apply for an unsecured debt consolidation loan in Canada:
- Fill out the online application. Provide details like your loan purpose, name, contact information, housing situation, employment and income.
- Wait for a decision. Wait to find out whether you’re pre-approved or denied.
- Get verified. If you’re pre-approved, submit documents to verify your identity and income, such as government-issued ID and bank statements.
- Get an offer. Review the loan agreement, taking into account the interest rate, loan amount, loan term, payment schedule and any extra costs you may encounter. Sign and submit if you’re comfortable with the terms.
- Get funded. The lender usually settles the debt and pays all your creditors at once.
If you have a lot of debt and don’t want to put up any collateral, looking into an unsecured debt consolidation loan could be the right call to help you pay that debt off faster. With lenders offering competitive rates and loan terms, you could find yourself paying your debt quicker and cheaper than you are now.
Before applying for an unsecured debt consolidation loan, you may wish to compare other options to consolidate debt.
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