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, these are generally for more extreme debt issues. A debt consolidation loan can help you restructure your debt in a way that is streamlined and more affordable.
Here is our guide on everything you need to know about debt consolidation loans in Canada.
Key Points
- Debt consolidation loans comes in both unsecured and secured forms.
- A debt consolidation loan can help you save money, make payments more affordable and streamline payments.
- You can get a debt consolidation loan from various lenders including banks, credit unions and alternative lenders.
Can You Get A Debt Consolidation Loan In Canada?
A debt consolidation loan (either secured or unsecured) is used to pay off high-interest debt. The idea is to combine or consolidate existing loans into one larger, more affordable, and easier-to-manage loan. The goal is to save money on interest and become debt-free sooner.
How Does A Debt Consolidation Loan Work?
A debt consolidation loan works just like any other type of 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.
Keep in mind that certain types of debt can’t be consolidated, such as car loans and mortgages.
Debt Consolidation Loan Features Overview
| Loan Amount | Loan amounts available depend on your lender, credit and finances. However, you can generally get up to $35,000 unsecured with most 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. Mortgages and car loans are usually not allowed. |
What Do You Need To Be Eligible For A Debt Consolidation Loan In Canada?
- Good credit – Most lenders require borrowers to have good credit. However, you may qualify with bad credit if you can reduce your risk in other ways, such as providing collateral or a cosigner.
- Enough income to cover payments – You must have an income high enough to cover your loan payments after your other expenses or debt obligations.
- Bank Account—Most lenders require an active bank account to verify identity and income, as well as for funding and repayment purposes.
| 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
- 9 – 78 Months
- Amount
- Up to $60,000†
- Rate
- 19.99% – 34.99%*
- Term
- 6 – 120 months
- Amount
- Up to $10,000
- Rate
- Varies by product
- Term
- Varies by product
How To Apply For A Debt Consolidation Loan In Canada
- Compare Lenders. Before choosing a lender, be sure to get pre-approved so you can compare offers.
- Fill Out the Application. Once you find a good offer, work with the lender to finalize the application and submit any documents that may be required.
- Get Funded. If you’re approved, you’ll receive your loan via e-transfer or direct deposit.
Learn more: How To Apply For A Loan
Types Of Debt Consolidation Loans Available In Canada
There are a few ways you can consolidate your debt. Depending on the method 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 securing the loan by getting a co-signer.
Pros
- You can consolidate multiple debts, making payments easier to track
- You can save money on interest if you can secure a low interest rate
- You can lower your payments by choosing a longer loan term
- You’ll build credit with each on-time payment
Cons
- A cosigner is often required if you have bad credit
- You need a good credit score to qualify
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 – A home equity line of credit works similar to a credit card, except you only have to make interest payments. Principal payments aren’t required until the draw period is over, which can be as long as 10-15 years. A heloc is also secured by your home.
Pros
- You can consolidate multiple debts, making payments easier to track
- You can secure lower interest rates than an unsecured debt consolidation loan due to the collateral provided
- Due to the collateral, you can qualify more easily and for larger loan amounts and lower rates. Moreover, you may have an easier time qualifying even if you have bad credit.
- You’ll build credit with each on-time payment
Cons
- You can lose your asset if you miss payments
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 say you have two credit cards with one holding a balance of $3,000 and another with a balance of $2,000. 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 it 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 on interest and you’d be paying $175 less each month. The only downside is that you’d be making payments for a longer period of time.
However, if you lower 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) you’re being offered actually going to save you money in the long run?
- Loans Fees. Consider all the fees associated with your loan. Even if you receive a low-interest rate, having to cover 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?
- 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 A Lot Of High-Interest Rate Debt. Do you have a lot of credit card debt or payday loans? A debt consolidation loan can keep those payments low and save you money on interest.
- You Want To Lower Your Payments. Debt consolidation can spread your debts over long periods of time, which can make your payments affordable.
- You’re Eligible. It can be hard to qualify for a debt consolidation loan without good credit.
Alternatives To A Debt Consolidation Loan In Canada
There are many other debt relief sources 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 – 12 months. This can save you a lot of money on interest.
Learn more: How To Consolidate Credit Card Debt In Canada: A Complete Guide
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 it off. They will also work to stop 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 spiraled 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 be up to 5 years long and can harm your credit.
Learn more: Consumer Proposal
Bottom Line
Everyone’s financial situation is different, which means that a debt consolidation loan may not be the best option for you. But, if you feel as though you could benefit from a debt consolidation loan and are interested in learning more, we can help.
Debt Consolidation Loans FAQs
Can I get a debt consolidation loan with bad credit?
Will a debt consolidation loan hurt my credit?
What kind of debt can I pay off with a debt consolidation loan?
Do I need collateral to get a debt consolidation loan?
Why was I rejected for a debt consolidation loan?
Can I get a debt consolidation loan without a job?
®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.
