📅 Last Updated: October 1, 2021
✏️ Written By Bryan Daly
🕵️ Fact-Checked by Caitlin Wood

Living in Ontario can be expensive, especially in its major cities like Toronto and Ottawa. As a result, you can end up with quite a bit of debt on your hands. While paying down debt is easy enough when you don’t have a lot of it, it’s definitely more difficult when you have outstanding bills spread across many different creditors. If that’s the case, debt consolidation may be the right solution for you.

Looking for more information about loans in Ontario? Try reading this.

How Ontario Borrowers Get Stuck in Debt

Debt can come from many places, considering all the expenses that the average Ontario resident must regularly deal with. Some of the more common debts stem from:

  • Overspending with credit cards and not paying your monthly bills on time
  • Having multiple other credit products that you have trouble keeping track of
  • Reduced hours at work or losing your job altogether
  • Paying for an apartment, condo, or house that’s out of your budget
  • Any expenses related to your dwelling (repairs, renovations, maintenance, etc.)
  • Costs you didn’t anticipate (emergencies, car accidents, medical issues, etc.)

Beneficial Debt vs. Damaging Debt

While debt can become a major problem for people in Ontario, you shouldn’t automatically assume that all debt will ruin your finances. In fact, some debt can be good, but only under the appropriate circumstances.

Beneficial Debt

Learning to become a responsible credit user in Ontario can be tough. When you’re approved for your first credit card, it can be tempting to go overboard with your spending habits. Your first large credit card bill can often be quite a shock for many new credit users, most consumers in Ontario learn quickly how their spending habits, debt levels, and credit are all linked.

Will paying off your credit card bill help increase your credit score? Find out here.

Your credit products and your credit score directly affect each other. As soon as you use your first credit card, you’ll start building that score, which is a 3-digit number ranging from 300-900, which represents your actions as a credit user. Your score goes up and down whenever you make or miss a payment. When you apply for new credit, your lender in Ontario will often look at your credit score to decide how responsible you’ll be with your potential payments. A good score equals higher approval chances and lowers interest rates. A bad score has the opposite effect. By taking on debt and paying it off promptly, you’ll raise your score, opening up a world of possibility for future credit products. After years of good debt and credit, you can even be approved for the ultimate beneficial debt type, a mortgage. See? Not all debt is bad, it just depends on how you handle it.

Read this for some information about mortgages in Ontario.

Damaging Debt

Even though debt is not automatically bad, it can certainly get that way when you don’t handle it responsibly. For example, your credit cards can cause extremely bad debt when you charge every little expense to them but don’t have a high enough income to support your monthly payments.

The same can be said about mortgages. Even though paying off a house in Ontario can be rewarding and therefore a good debt to take on, it can have the opposite effect when you apply for a mortgage in Ontario that you can’t afford. The massive debt caused by your payments, interest rate and fees, coupled with homeowner-related expenses, plus your other living costs in Ontario can be very hazardous and leave you house poor.

Payday loans can also cause terrible debt because of their high-interest rates and fees. While they’re very easy to get, they come with a very short mandatory payment period (2 weeks following approval). Borrowers in Ontario who can’t get approved elsewhere often turn to payday loans as a last resort. Coupled with their other expenses, these borrowers in can’t afford to pay back their loan within 2 weeks, get charged a penalty and end up in worse debt. They may even start relying on payday loans just to get by.

Learn How to Tackle DebtDo you need help creating a plan to tackle your debt? Check out this infographic.

The Two Types of Debt Consolidation

With debt consolidation, the ultimate goal is to lump all of your outstanding debts together and eliminate them in one shot. While you may be able to do this with your income and savings, that may leave you with no money for your other expenses. There are two debt consolidation options that can help you avoid this risk.

Debt Consolidation Loans

Having multiple debts of different amounts with different due dates to keep track of is a frequent cause of debt-related issues. So, this first consolidation option involves taking out one large loan to pay off all those debts at once, leaving you with a single monthly payment to deal with. You can apply for one of these loans through your bank or another lender in Ontario. It’s also possible to receive a lower interest rate which can potentially save you a lot of money over time.

Things to consider when it comes to debt consolidation loans:

  • Like with any credit product, defaulting on your payments can simply result in further debt, making your financial situation even worse.
  • Qualifying for a loan in Ontario sometimes requires you to offer up assets as collateral (house, car, etc.) to secure the loan. If you default for too long (usually 90 days overdue), your assets may be at risk of foreclosure or repossession.
  • Some lenders in Ontario, such as banks and credit unions prefer you to have a decent credit score (620 or higher), as well as a good income before they approve you.
  • As your credit score will be affected, it’s important to always make your payments on time and in full. Defaulting can result in very bad damage to your score.

Made a late payment? Here’s how you can rebuild your credit score.

Debt Consolidation Programs

Sometimes known as debt management programs, these services work along the same lines as debt consolidation loans, in that all your debts will be paid off at the same time, leaving you with only one monthly payment to remember. However, whereas a debt consolidation loan is handled by yourself, you would instead be working with a certified credit counsellor. In turn, you’ll make payments toward your counsellor, who will pay off your lenders on your behalf. Instead of having a loan with an interest rate, you’ll simply be paying for your counsellor’s services.

Things to consider when it comes to debt consolidation programs:

  • Some credit counselling agencies in Ontario charge a fee for their services, while some are non-profit. The initial consultation, however, should be free, so ask your potential counsellor how much they charge (if at all) for their programs.
  • Once again, you’ll need to manage your payments responsibly if you want to avoid further debt issues, as well as damage to your credit score.
  • Your credit score will continue to be affected for 2 years following the completion of your program.
  • Some lenders in Ontario might not agree to the terms of your program. If this happens, your credit counsellor will have to reevaluate and draw up a new proposal.

Click here for some facts about credit counselling in Ontario.

Debt Types That Qualify for Consolidation

Before you apply for either debt consolidation service, ask a financial advisor or a credit counsellor whether your own debts will qualify, as there are some types that will not. Generally speaking, most unsecured debts, where no collateral is involved, do qualify. On the other hand, many secured, collateral-based debts do not.

Some Debts That Qualify

  • Consumer and retail location credit card bills
  • Unsecured personal loan payments
  • Vehicle repossession debt
  • Overdue cell-phone bills
  • Overdue utility bills

Some Debts That Don’t Qualify

  • Mortgages
  • Secured car loans
  • Secured personal loan payments

Want to learn about personal loans in Ontario? Take a look at this.

Frequently Asked Questions

What do I need to qualify for a debt consolidation loan?

Conditions for approval will vary depending on the lender and the product. However, be aware that most will not qualify you if you are already consolidating your debts through credit counseling, a consumer proposal, or bankruptcy. You’ll also need a steady income with a reasonable amount of debt compared to income. If you cannot qualify for a debt consolidation loan, then it might be time to look into a debt consolidation program where no new loans are involved.

Should I get a debt consolidation loan?

If you’re having trouble paying down multiple loans at high rates, it may be time to consider consolidating them while you have the opportunity. The best time to do so is while your credit score hovers around 600 and less than half your income is going towards loan payments. It’s important that you’re ready to start budgeting as well. You shouldn’t be taking on new loans until your consolidated debts have been paid out completely.

Are there debts that cannot be consolidated?

Generally, the only debts you should consider consolidating are unsecured high-interest debts. Student loans and overdue taxes, however, are best excluded from a consolidation loan. You should be able to negotiate favorable payment arrangements separately. Secured loans such as car loans, mortgages, or home equity loans shouldn’t be consolidated either. But, lenders can use those secured loans to roll in your unsecured debts for consolidation purposes.

Consolidating Your Debts With Loans Canada

If you’re thinking about applying for a debt consolidation loan in Ontario or you’d like some information about debt consolidation programs, contact Loans Canada today. We can help you find the debt relief services that you’ve been searching for.

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