If you’re looking to simplify your debt payments or save money, a debt consolidation loan can be a great solution. While there are other debt relief options available to Canadians for more extreme debt issues, a debt consolidation loan can help you restructure your debt in a way that is streamlined, more affordable, and can protect your assets and credit health.
Here is our guide on everything you need to know about debt consolidation loans in Canada.
Key Points
- Debt consolidation loans come in both unsecured and secured forms.
- A debt consolidation loan can lower your interest rate, make payments more affordable and streamline payments.
- You can get a debt consolidation loan from various lenders, including banks, credit unions and alternative lenders.
What Is A Debt Consolidation Loan?
A debt consolidation loan (either secured or unsecured) is used to pay off high-interest debt. The goal is to combine existing loans into one larger, more affordable loan. Since you’d be paying a lower interest rate overall, you’d become debt-free sooner.
Learn more: Understanding Secured And Unsecured Debt
How Does It Work?
A debt consolidation loan works like any other loan. However, in this case, once you’ve been approved, you’ll use the money you receive to pay off any debts you want to consolidate, especially high-interest debt. This can be credit card debt, personal loan debt, or any other type of debt that is eligible.
| Note: Secured debts are typically excluded from a debt consolidation loan. They’re more complex, often requiring refinancing instead. |
Debt Consolidation Loan Features: Overview
| Loan Amount | Loan amounts available depend on your lender, creditworthiness, and financial situation. However, you can generally get up to $50,000 unsecured with many lenders. If you have collateral, that amount can increase to over $100,000. |
| Interest Rates | Rates can range from 5% to 35%, depending on your finances and security. However, a debt consolidation loan is only worth it if you can secure a rate that is lower than the debts you want to consolidate |
| Terms | Terms usually range from 12 months to 5 years. |
| Types Of Debt You Can Consolidate | You can consolidate unsecured debt, such as credit cards, personal loans, and payday loans. |
What Do You Need To Be Eligible For A Debt Consolidation Loan?
To qualify for a debt consolidation loan, you must meet the lender’s criteria, which typically include the following:
- Good Credit: Most lenders require borrowers to have good credit. However, you may qualify with a lower credit score if you can reduce your risk in other ways, such as providing collateral or a cosigner.
- Sufficient Income: You must have an income high enough to cover your loan payments after your other expenses or debt obligations.
- Active Bank Account: Most lenders require an active bank account to verify identity and income, and to fund and repay loans.
| Can You Get A Debt Consolidation Loan With Bad Credit In Canada? If you have bad credit (lower than 559) due to old credit mistakes, you may still qualify for a debt consolidation loan with an alternative lender. These lenders generally approve borrowers based on their overall financial health. Learn more: Bad Credit Debt Consolidation |
Where Can You Get The Best Debt Consolidation Loans In Canada?
Filters
- Amount
- Up to $35,000
- Rate
- 9.99% – 34.95%
- Term
- 6 – 84 Months
- Amount
- Up to $60,000†
- Rate
- 19.99% – 34.99%*
- Term
- 6 – 120 months
- Amount
- $500 – $10,000
- Rate
- Up to 34.99%
- Term
- Up to 60 months
How To Apply
To apply for a debt consolidation loan in Canada, follow these steps:
Step 1: Compare Lenders
Before choosing a lender, be sure to get pre-approved so you can compare offers. Use an online loan comparison platform like Loans Canada to quickly compare lenders and their loan offers.
Step 3: Fill Out the Application
Once you find a good offer, work with the lender to finalize the application. You’ll also need to submit any documents that may be required, which can include the following:
- Photo ID: A driver’s license or passport may be required to verify your identity and age.
- Proof of Residency: You’ll need to be a Canadian citizen or permanent resident to qualify for a debt consolidation loan in Canada.
- Proof of Income: Bank statements and pay stubs may be required to show the lender that you earn enough to cover your loan payments. You may also need to show your debt load so the lender can calculate your debt-to-income ratio to verify that you have enough money after paying your bills to make your payments.
| Check Your Credit Score Before Applying Make sure you meet the lender’s credit score requirements before filling out an application. You can check your credit score quickly and for free by using Loans Canada’s CompareHub tool. |
Step 3: Get Funded
If you’re approved, you’ll receive your loan via e-transfer or direct deposit. Depending on the lender, you could receive the funds within 24 hours to a few days followingapproval.
Learn more: How To Apply For A Loan
Types Of Loans You Can Use To Consolidate Debt
There are a few ways you can consolidate your debt. Depending on the product you choose, it will come with advantages and disadvantages.
Consolidate Your Debt With A Personal Loan
A personal loan from a bank, credit union, or alternative lender is a popular way to consolidate debt. However, to qualify for a big loan amount with a low interest rate, you’ll usually need a high income and a good credit score. As such, it’s best to check your credit score before applying for a loan.
You can also improve your chances of loan approval by obtaining a co-signer or providing collateral.
Pros:
The benefits of using a personal loan are as follows:
- Several Debts May Be Consolidated: You can consolidate multiple debts to make payments easier to track.
- Secure A Lower Rate To Save Money: Save money on interest if you can secure a low interest rate.
- Extend The Term To Spread Out Payments: Lower your payments by choosing a longer loan term.
- Improve Your Credit Score: Build credit with each on-time payment.
Cons:
Consider the following potential drawbacks of using a personal loan to consolidate your debt:
- Cosigner May Be Needed: A cosigner is often required if you have bad credit.
- Good Credit May Be Required: You need a good credit score to qualify.
- Can Add To Your Debt: A personal loan is still another loan. If you don’t use it to pay off existing debt, you’ll owe more.
Consolidate Your Debt Using Your Home’s Equity
If you have equity in your home, you can consolidate your debts using a home equity loan or line of credit.
- Home Equity Loan: A home equity loan works just like a personal loan, except it’s secured by your home.
- Home Equity Line Of Credit (HELOC): A home equity line of credit works similarly to a credit card, except you only have to make interest payments. Principal payments aren’t required until the draw period ends, which can last 10 to 15 years. A HELOC is also secured by your home.
Learn more: HELOC Vs. Home Equity Loan For Homeowners
Pros:
The benefits of using a personal loan are as follows:
- Simplified Bill Management: You can consolidate multiple debts, making payments easier to track.
- Lower Rates Possible: You can secure lower interest rates than an unsecured debt consolidation loan due to the collateral provided.
- Higher Loan Amounts & Lower Rates Possible: Due to the collateral, qualifying is easier, you may be approved for a larger sum, and interest rates may be lower.
- Use It To Build Credit: You’ll build credit with each on-time payment.
Cons:
The following potential downsides of using home equity to consolidate your debt should be considered:
- Asset Risk: You can lose your home if you miss your loan payments.
- Risk Of Re-Accumulating Debt: Consolidation doesn’t fix spending habits. Even after you pay down your debt with home equity, you still run the risk of racking up new balances, ending up with more debt overall.
| How much equity do you have? Your home equity is the portion of your home that you own. For example, if your home is worth $250,000 and you’ve paid off $100,000 of your mortgage, you currently have $100,000 worth of equity in your home. |
How Much Can You Save By Consolidating Debt?
To demonstrate the savings of a consolidation loan, let’s use an example.
For instance, let’s say you have two credit cards: one with a $3,000 balance and another with a $2,000 balance. Assuming you’re making monthly payments of $200 to each credit card, how long will it take to pay it off, and how much interest will you pay?
Similarly, we’ll calculate how long and how much it would take to pay off the credit cards if you consolidated them into a personal loan. For this example, we’ll assume you’ve secured a 2-year personal loan with an interest rate of 7.5%.
| Credit Card 1 | Credit Card 2 | Consolidation Loan | |
| Loan Amount | $2,000 | $3,000 | $5,000 |
| Interest | 19.99% | 19.99% | 7.5% |
| Monthly Payment | $200 | $200 | $225 |
| Number Of Monthly Payments | 12 | 18 | 24 |
| Total Paid | $2,205.97 | $3,480.98 | $5,400 |
| Total Interest Paid | $205.97 | $480.98 | $400 |
As you can see in the table above, by consolidating your loan, you would save $286.95 in total interest paid and $175 less each month. The only downside is that you’d be making payments for a longer period.
However, if you reduce your term to a year and increase payments to $434 a month, you can pay off your loan within 12 months, and only pay $208 in interest.
What To Consider When Choosing Debt Consolidation Loans
Ultimately, when it comes to applying for a debt consolidation loan, you will find there are many options to choose from. This is why it’s important to consider the following three factors when determining which options are best for your needs.
- Loan Amount Available: Debt consolidation loans work best when you can pay off all your eligible high-interest debt. This means you need to find a lender who can approve you for the right amount.
- APR: Probably one of the most important things to consider is the APR (the total cost of borrowing over a year). Will the rate you’re offered actually save you money in the long run?
- Loan Fees: Consider all the fees associated with your loan. Even if you receive a low interest rate, excessive fees will negate the savings. Also, don’t forget to consider prepayment penalties for the loans you plan to pay off with your consolidation loan.
When Should You Consolidate Your Debt?
Debt consolidation makes most sense in the following scenarios:
- You’re Struggling To Keep Track Of Your Payments: If you have multiple debts with varying due dates, a debt consolidation loan can help you streamline your payments into one bill.
- You Have Lots Of High-Interest Debt: A loan can keep outstanding payments low and save you money on interest.
- You Want To Lower Your Payments: Debt consolidation can spread your debt over a longer period, making your payments more affordable.
- You’re Eligible: It can be hard to qualify for a debt consolidation loan without good credit.
Alternatives To A Debt Consolidation Loan
Other debt relief sources are available in Canada. Here are a few alternative solutions:
Credit Card Balance Transfer
If you’re particularly struggling with a lot of credit card debt. You can opt for a credit card balance transfer. This form of debt consolidation allows you to consolidate all your credit card debt by transferring your balances to a new credit card at a very low rate.
Typically, credit card balance transfers have rates that start as low as 0% for 3 to 12 months. This can save you significant money on interest.
Debt Management Program
A debt management program (DMP) is a great option for those who want to lower their monthly obligations by extending their repayment time. With a DMP, your credit counsellor will work with your creditors to consolidate your debts and give you up to 5 years to pay them off. They will also work to prevent any more interest and penalty charges during this time.
That said, keep in mind that a DMP will be reported on your credit report, which may hurt your credit.
Learn more: Debt Management Program In Canada
Consumer Proposal
If your debt has spiralled out of control, a consumer proposal may be a more suitable option. With a consumer proposal, your Licensed Insolvency Trustee (LIT) will work with your creditors to come up with a debt repayment plan that is fair to you and them. A consumer proposal can last up to 5 years and can harm your credit.
Learn more: Consumer Proposal
Common Mistakes To Avoid When Consolidating Debt
If you choose to consolidate your debt, be sure to avoid the following:
Not Addressing The Root Cause Of Debt
Consolidation simplifies loan payments, but it doesn’t fix overspending or poor budgeting behaviours. Without changing the habits that got you into your current situation, you risk building up new debt on top of the consolidated loan.
Not Doing The Math With Interest Rates
Some consolidation loans don’t actually lower your overall interest rate. Always crunch the numbers and compare your current rate with the new loan offer.
Overlooking Fees And Costs
Application fees, balance transfer fees, and closing costs can cut into your savings. Make sure the loan’s total cost is lower than your current debt structure.
Not Considering All Options
Debt consolidation isn’t the only solution. Alternatives like balance transfer credit cards, debt management plans, or negotiating directly with creditors may be better depending on your situation.
Missing Payments
A single missed payment can damage your credit score and increase costs. Consider setting up automatic payments or reminders to stay on track.
Extending Loan Terms Too Long
Longer repayment terms lower monthly payments but increase total interest paid. Make sure to balance affordability with minimizing long-term costs.
Bottom Line
A debt consolidation loan can be a smart way to simplify your finances by rolling multiple payments into one. It often comes with lower interest rates, helping you save money while staying on track. With the right lender and a solid repayment plan, it’s a powerful step toward financial freedom.
Debt Consolidation Loans FAQs
Can I get a debt consolidation loan with bad credit?
What kind of debt can I pay off with a debt consolidation loan?
Will a debt consolidation loan hurt my credit?
Do I need collateral to get a debt consolidation loan?
Can I get a debt consolidation loan without a job?
Why was I rejected for a debt consolidation loan?
®Fairstone Financial Inc. is a wholly owned subsidiary of Fairstone Bank of Canada.
*Interest rates are subject to change. Actual Annual Percentage Rate (APR) varies based on the province of residence and individual factors like credit details and loan amount. The interest rate on an unsecured personal loan is 31.99% in BC.
†On approved credit. Terms and conditions apply. Interest rates vary by province/territory and from customer to customer based on factors like credit score and borrowing history. See Fairstone’s website for details.
Fairstone Financial Inc. holds high-cost credit licenses in AB, MB (License #85047, expiring 20-02-2026) and QC; it has applied for a high-cost credit grantor license in NL. For license information by province, visit Fairstone.ca/HCCG
In Ontario, Fairstone Financial Inc. is licensed as mortgage brokerage 10821.
In Nova Scotia, Fairstone Financial Inc. is licensed as mortgage lender #2021-3000028.
