Are you drowning in multiple debts? If so, debt consolidation may be a lifesaver for you. By rolling all your existing debt payments into one manageable payment, you can simplify debt repayment and even cut down on interest costs. Whether through personal loans, balance transfer credit cards, home equity options, or debt management plans, debt consolidation gives you a leg up on attaining financial freedom.
In this guide, we’ll look at several strategies available for debt consolidation to help you reduce or eliminate your debt and streamline your finances.
Key Points
- Debt consolidation involves combining multiple debts into one manageable payment.
- There are many methods to consolidate debt including loans, balance transfer credit cards and debt management plans.
What Is Debt Consolidation?
Debt consolidation is the process of combining several debts into one loan or payment, usually with a lower interest rate. This process streamlines debt repayment and can help you manage your finances more effectively.
Pros And Cons Of Debt Consolidation
Before considering debt consolidation, be sure to weigh the benefits and drawbacks:
Pros
- Simplifies payments by combining multiple debts into a single one, making loan repayment easier.
- Lower interest rates can reduce the overall amount of interest owed.
- Boost your credit score by lowering your credit utilization ratio through repayment of high-interest credit cards.
Cons
- Higher overall interest costs if you extend the repayment term
- Potential risk of accumulating debt if you lack financial discipline.
- Possible impact on your credit score if you close old credit accounts because it shortens your credit history and reduces your credit mix. A hard inquiry when you apply for debt consolidation can also temporarily cause your score to dip.
Types Of Debt Consolidation In Canada
Several forms of debt consolidation are available to help Canadians reduce their debt and better manage their finances:
- Debt consolidation loan
- Credit card balance transfer
- Debt management program (DMP)
Debt Consolidation Loan
A debt consolidation loan is a type of financing that allows you to combine several debts into a single loan, which can help simplify repayments. It typically comes with a fixed interest rate and loan term, allowing for more predictable monthly repayments. This option may be ideal to pay down high-interest debts, like credit cards, more efficiently.
Debt consolidation loans can take many forms, such as the following:
| Personal Loan | Line Of Credit | HELOC | Home Equity Loan | |
| Loan Type | Installment loan | Revolving credit | Revolving credit | Installment loan |
| Loan Amounts | Up to $35,000+ | Minimum $3,000 – $5,000, though it depends on the lender and borrower’s credit and finances | Up to 65% of the home’s value | Up to 80% of the home’s value |
| Equity Required? | No | No | Yes | Yes |
| Interest Rates | Typically fixed | Typically variable | Typically variable | Typically fixed |
| Loan Terms | Typically 12 – 60 months | No fixed repayment schedule | -Draw Period: ~10 years -Repayment period: Up to 20 years | Typically 5 – 30 years |
| Repayments | Installment payments over a fixed term | -Can be repaid at anytime -Minimum payment required each month | -Interest-only payments in the draw phase -Interest & principal due in the repayment phase | Installment payments over a fixed term |
Personal Loans
A personal loan is a type of installment loan that provides a lump sum of money to be used for various purposes, including paying off all existing debts. The loan is repaid through installments over time.
Who Are Personal Loans Best For?
Personal loans are best for those who:
- Are in need of a fixed sum of money for specific purposes, such as consolidating debt.
- Prefer predictable repayments.
- Earn a steady income and have the credit score required to qualify for approval.
Pros
- Flexible use of funds.
- Fixed payments with fixed rates, make them easier to budget for.
- No collateral is required.
Cons
- Higher interest rates if unsecured.
- Increase in debt if the loan is mismanaged.
- Good credit may be required to secure favourable terms and a lower interest rate.
Find the Best Personal Loans
Lines Of Credit
A line of credit lets you access funds in a credit account up to a certain limit as required. You can draw from the account as often as needed, and just pay interest on the amount withdrawn.
Once you repay the funds, you can borrow from the account again and again. The funds can be
used for various reasons, including consolidating debt.
Who Are Lines Of Credit Best For?
Lines of credit are best for those who:
- Need flexible access to money for various purposes.
- Have financial discipline and won’t be tempted to overspend.
- Have good credit to qualify.
- Don’t have collateral to back a secured loan option.
Pros
- Flexibility to borrow only what you need, when it’s needed, up to your credit limit.
- You only pay interest on the amount you borrow, not the entire credit limit.
- Money becomes available again when you pay back what you borrow, offering continuous access to funds.
Cons
- Variable interest rates mean your payments can fluctuate.
- Risk of overspending since you have easy access to funds from your credit account.
- Impact on your credit score if you continuously borrow close to your credit limit, which would increase your credit utilization ratio.
Find the Best Line Of Credit Rates In Canada
Home Equity Loans
A home equity loan lets you borrow a lump sum of money from the equity in your home. Like a regular installment loan, you then repay the amount borrowed, plus interest, over a set term through installments. Depending on how much equity you have in your home, you may be able to access a sizable amount of money, which can be helpful if you have a high debt load to pay off.
Who Are Home Equity Loans Best For?
Home equity loans are best for those who:
- Are homeowners who need a significant loan amount to cover a large expense.
- Have enough equity in their home to qualify.
- Earn a steady income and have good financial discipline.
- Want lower interest rates compared to unsecured loans.
Pros
- Lower interest rates thanks to the use of home equity as collateral.
- A sizable lump sum of money is accessible, making it ideal for large expenses.
- Fixed payments with fixed interest rates, result in predictable monthly payments.
Cons
- Collateral is at risk if you miss your payments.
- Upfront fees, such as closing costs and appraisal fees, can add to the total cost.
- Increase in your overall debt load.
Home Equity Lines Of Credit (HELOC)
A HELOC lets you borrow money from your home’s equity as needed. It’s similar to a regular line of credit in that you can withdraw and repay money from your credit account as often as needed, up to a set credit limit. However, with a HELOC, the equity is used as collateral.
HELOCs typically come with variable rates, and you only pay interest on what you borrow.
Who Are HELOCs Best For?
HELOCs are best for those who:
- Own a home and have sufficient equity.
- Need flexible access to funds for ongoing expenses.
- Have disciplined financial habits.
Pros
- Borrow as needed, making it ideal for ongoing expenses.
- Lower interest rates compared to other revolving types of credit, like credit cards.
- Only pay interest on what you borrow, and not the whole credit amount.
Cons
- Most HELOCs have variable rates, which means your payments may fluctuate.
- Your home is used as collateral, so failure to make payments may result in repossession.
- Temptation to overspend thanks to easy access to funds.
Learn more: How To Borrow Using Your Home Equity
Credit Card Balance Transfers
A credit card balance transfer lets you transfer your outstanding credit card balance to another card, usually with a lower or 0% promotional interest rate. This can help lower the amount of interest paid and simplify payments.
If the balance is repaid within the introductory period, a credit card balance transfer can be an effective strategy to manage high-interest debt. However, if you don’t repay your transferred balance before the promotional period ends, you will be charged the regular interest rate, which will be significantly higher than the promotional rate.
| Note: There is typically a balance transfer fee associated with transferring your outstanding credit card debt. These fees typically range from around 3% to 5% of the amount transferred. |
Who Are Credit Card Balance Transfers Best For?
Credit card balance transfers are best for those who:
- Have high-interest credit card debt and want to save money on interest.
- Want to pay off their credit card balances more quickly.
- Are financially disciplined and can repay the debt within the promotional period.
- Have good credit needed to qualify.
Pros
- Promotional rates can be as low as 0%, giving you some time to pay down your outstanding debt with zero interest and save money.
- Repaying your balance can reduce your credit utilization and improve your credit score.
- Improved cash flow thanks to lower monthly interest costs, which can free up money for other expenses.
Cons
- Balance transfer fees of anywhere from 3-5% of the transferred amount can add to your overall debt.
- Limited promotional period may not be enough time for you to pay down your debt.
- If you don’t pay down your balance at 0% interest, the unpaid balance will revert to a higher interest rate once the promotional period ends.
Learn more: Best Balance Transfer Credit Card In Canada 2025
Debt Management Plan (DMP)
A debt management plan is a repayment program that is facilitated by a credit counselling agency to help consumers manage their unsecured debts, such as credit card debt or personal loans. Under this plan, the credit counsellor will negotiate with your creditors to reduce your interest rates, waive fees, or come up with a payment schedule that you can more easily manage.
This plan typically takes around 3 to 5 years to complete. No loan is required, making this an ideal solution for those who don’t want to accrue more debt. However, your creditors will still need to be paid what they are owed based on your agreement.
Who Are Debt Management Plans Best For?
Debt management plans are best for those who:
- Are struggling to manage their unsecured debts, such as credit cards.
- Earn a steady income.
- Are able to make consistent monthly payments.
- Need professional assistance organizing their debt repayment without taking on new loans.
Pros
- Combines multiple debts into a monthly payment, making debt more manageable.
- Credit counsellors often negotiate lower interest rates with creditors, saving you money.
- Unlike a debt consolidation loan, debt management doesn’t require taking on additional debt.
Cons
- Only deals with unsecured debts, and not secured debts, like mortgages or car loans.
- Entering a debt management plan can negatively affect your credit score, since it’s recorded on your credit report.
- Not all creditors may agree to the negotiated terms.
How Does A DMP Compare To A Debt Consolidation Loan?
The following chart outlines the differences between debt management plans and debt consolidation loans:
| Debt Consolidation Loan | DMP | |
| Debt Amount | $1,000 – $50,000 | No limit |
| Interest Rate | 8% – 28% | Up to ~10% |
| Repayment Time | 24 – 60 months | 36 – 60 months |
| Debts Included | Unsecured debt, sometimes student loans & back taxes | Unsecured debt |
| Good Credit Required? | Yes | No |
Will Debt Consolidation Affect Your Credit?
Your credit score may be affected — positively or negatively — depending on which debt consolidation option you choose and how you manage it:
Debt Consolidation Loan
- On-time payments will help build a positive payment history. Similarly, missed payments can negatively affect it.
- Improves credit utilization by paying off high-interest credit balances.
- Reduction in credit age because you’re paying off older accounts and adding a new loan.
- Hard credit checks when applying for a debt consolidation loan may temporarily lower your score.
Credit Card Balance Transfer
- Paying off high-interest card balances lowers your credit utilization ratio, which is good for your credit.
- Hard inquiry can temporarily reduce your credit score when you apply for a new credit card.
- Reduction in credit age by adding a new credit account to your profile.
DMP
- Enrolling in a DMP will result in an R7 crediting rating which will stay on your credit report for 2 years after you’ve completed the program.
Can You Consolidate Tax Debt in Canada?
Yes, you can consolidate tax debt in Canada. To do so, you have a few options:
- Set Up A Payment Arrangement With The CRA – The CRA offers taxpayers the ability to set up a pre-authorized repayment plan that suits their finances. Keep in mind that this option does not reduce what you owe, but simply makes your repayment easier to manage while fulfilling your debt obligations with the CRA.
- Take Out A Loan – You can also consolidate your debt by taking out a loan and using the funds to pay your taxes. That said, this option is only recommended if you can get a rate that is lower than what the CRA charges or if you’re looking to spread the payments over a longer period so it’s lower than the CRA payment arrangement.
Learn more: Can You Consolidate Tax Debt in Canada?
Can You Consolidate Secured Debt?
Secured debt cannot be consolidated with a credit card or DMP. However, you may be able to use the funds from a personal loan, home equity loan, or line of credit to consolidate secured debt.
If you plan to consolidate secured debt, make sure you can qualify for a lower rate. Otherwise, you may not see any savings after your interest is paid.
Strategies To Help You Pay Off Debt
There are several strategies you can use to pay down your debt and improve your financial situation.
Come Up With A Budget
Track your monthly income and expenses to pinpoint where you can scale back on your spending and put more money toward repaying your debt. To make budgeting easier for you, consider using one of the many budgeting apps available, like YNAB and KOHO.
Use The Avalanche Or Snowball Debt Repayment Method
Two popular strategies for paying off debt include the avalanche and snowball methods:
- Avalanche Method: This strategy focuses on paying off highest-interest debts first, while making minimum payments on all others. When the first debt is repaid, you’ll move on to the next highest-rate debt. This method saves money on interest over time.
- Snowball Method: This strategy focuses on paying down the smallest debt first, while making minimum payments on all others. When the first debt is repaid, you’ll move on to the next smallest debt. This method builds motivation, as smaller debts take the shortest amount of time to pay off.
Speak To Your Creditors
Reach out to your creditors to see if they are willing to defer your loan payments or reduce your interest rates. Payment deferral can provide temporary cash flow relief and help you avoid late fees if you can’t meet the due dates. Having your interest rates reduced can lower what you owe overall and help you save money.
Be sure to reach out to your creditors before you miss payments to show that your account is in good standing and to minimize repercussions for missing payments.
Other Ways To Alleviate Debt
If your financial woes are more severe and debt consolidation may not be enough to help, you may consider other options to relieve you of your debt.
Debt Settlement
Debt settlement involves negotiating with your creditors to reduce the total amount you owe on your unsecured debts, such as credit cards. A representative of a debt settlement company will negotiate on your behalf to get your creditors to agree to a lump sum payment that’s less than the full balance you owe. This effectively settles your debt.
It should be noted that despite the financial relief provided by debt settlement, it will negatively affect your credit score.
Learn more: Debt Settlement
Consumer Proposal
A consumer proposal is a legally binding agreement that allows consumers to negotiate with creditors to lower the amount due on unsecured debts and establish a manageable repayment plan. This process is administered by a Licensed Insolvency Trustee (LIT) and offers protection from creditor actions, such as wage garnishments or lawsuits.
With a consumer proposal, you can keep your assets, unlike bankruptcy. You’ll need to make monthly payments, typically over a term of up to 5 years.
Your credit score will be negatively affected by a consumer proposal, which will stay on your credit report for 3 to 6 years.
Learn more: Consumer Proposal
Bankruptcy
Bankruptcy is a legal process that alleviates debt and helps consumers get a fresh financial start. It’s administered by an LIT who manages the process, including assessing your situation, dealing with creditors, and handling additional payments to be distributed to your creditors if your income exceeds a specific threshold, known as ‘surplus income’. Once you declare bankruptcy, most of your unsecured debts are discharged.
You may be required to give up non-exempt assets to help pay off creditors, such as equity in your home over a certain exemption and second vehicles. Further, your credit score will take a big hit and the bankruptcy will be noted on your credit report for 6 to 7 years (for first bankruptcies).
Learn more: Bankruptcy
Bottom Line
Debt consolidation can be an effective way to deal with your unmanageable debt and regain control over your finances. Several options may be available to you to help you consolidate your debt, including debt consolidation loans, credit card balance transfers, and debt management plans. By reducing interest rates and streamlining your loan payments, debt consolidation can save you money and help you become debt-free sooner rather than later.
