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đź“… Last Updated: December 1, 2023
✏️ Written By Caitlin Wood

Are you having trouble keeping up with all your debt payments? If yes, you should consider using one of the many debt relief options available to Canadians. Some common debt relief solutions include debt consolidation, debt management, debt settlement, a consumer proposal and in extreme cases bankruptcy. Depending on your situation, one solution will provide better financial relief than others. If you’re looking for a less severe option, then a debt consolidation loan could be a good option for you.

What Is A Debt Consolidation Loan?

A debt consolidation loan is a loan (either secured or unsecured) you use to pay off any high-interest debt you might have. The idea is to combine or consolidate existing loans into one larger, more affordable, and easier to manage loan. The end goal is to save money on interest and hopefully become debt-free quicker. 

How Does A Debt Consolidation Loan Work?

A debt consolidation loan works just like any other type of loan. But in this case, once you’ve been approved you’ll use the money you receive to pay off any high-interest debt you have. This can be credit card debt, personal loan debt, and any other type of debt that is eligible. Keep in mind that certain types of debt, think car loans and mortgages, cannot be paid off with a debt consolidation loan.

Check out this guide on loans in Canada.

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 1Credit Card 2 Consolidation Loan
Loan Amount$2,000$3,000$5,000
Interest19.99%19.99%7.5%
Monthly Payment$200$200$225
Number Of Monthly Payments121824 
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. 

How To Apply For Debt Consolidation Loans

  1. Find the right lender and fill out an application (most lenders will ask why you’re applying for a loan, you should explain that it’s for debt consolidation).
  2. Work with lender to finalize application, submit documents, and decide if a secured loan is the best option.
  3. Receive your loan, typically via direct deposit.
  4. Pay off existing high-interest debt and do not accumulate any more.
  5. Finally, now you must make your loan payments on time.

Debt Consolidation Loan Options In Canada

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Loans Canada
Loans Canada
Amount
Up to $50,000
Rate
Prime to 46.96%
Term
3-60 months
Fora
Fora
Amount
$1,000 - $10,000
Rate
19.69% - 46.9%
Term
Spring Financial
Spring Financial
Amount
Up to $35,000
Rate
9.99% - 46.96%
Term
6 - 60 Months
goPeer
goPeer
Amount
$1,000 - $25,000
Rate
7.5% - 31.5%
Term
36 - 60 months
Lendful
Lendful
Amount
$5,000 - $35,000
Rate
Starting at 9.99%
Term
6 - 60 Months
LoanMeNow
LoanMeNow
Amount
$500 - $1000+
Rate
28% to 32%
Term
3 Months
Consumer Capital Canada
Consumer Capital Canada
Amount
$500 - $12,500
Rate
19.99% to 34.99%
Term
No minimum term
easyfinancial
easyfinancial
Amount
$500 - $100,000
Rate
9.99% - 46.96%
Term
Varies
Mogo Finance
Mogo Finance
Amount
Up to $3,500
Rate
9.9% - 47.72%
Term
-
Fairstone Financial
Fairstone Financial
Amount
Up to $50,000
Rate
19.99% - 39.99%
Term
6 - 120
Unfortunately we couldn't find you a provider with the given filters

Types Of Debt Consolidation Loans Available In Canada

There are a few ways you can consolidate your debt. Depending on the type of method you choose, it will come with its own 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, in order 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 offering some form of collateral like a car or by getting a co-signer.

Consolidate Your Debt Using Your Home’s Equity

If you currently own a house then you can use your home’s equity to consolidate your debt. Your home’s equity is the portion of your home that you actually own. This means that 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.

You will use your house’s equity, as collateral, to gain access to your equity (the $100,000) to consolidate all your debt under one new loan. This is obviously only an option for those who have a mortgage and own a house but it can be a great option for someone struggling to get their debt under control. However, it’s important to remember that, if you’re unable to make your payments your house can be seized as collateral to pay off your debt.

Consolidate Your Debt With A 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 a period of time (usually between 3 – 6 months). This can save you a lot of money on interest. But, if you’re unable to pay off your debt during the introductory period, you should consider consolidating using a personal loan.

Debt Consolidation Loans For Bad Credit

Banks and credit unions want debt consolidation loan applicants to have good credit. This means if you have poor credit you likely won’t get approved for a debt consolidation loan from one of those financial institutions. But, this doesn’t mean you can’t consolidate your debt. Individuals with low credit should consider the following options if they are looking to consolidate high-interest debt:

Advantages Of Debt Consolidation Loans

Here are some of the advantages that come with taking out a debt consolidation loan; they should help you make the best choice for you and your financial situation.

  • Your payments will be fixed installments that are affordable and easy to remember.
  • Often you’ll be able to consolidate at a lower interest rate.
  • You’ll know the exact amount of time it’ll take to pay all your debts off
  • Services charges and extra fees are typically very low
  • You’ll build credit with each on-time payment.

Disadvantages Of Debt Consolidation Loans

While a debt consolidation loan is a great option for many consumers, this option is not without its disadvantages. Here are some of the disadvantages you should know about before you make any decisions.

  • Collateral or a cosigner is often required
  • A decent credit score is important
  • An unsecured debt consolidation loan can come with a high-interest rate
  • You’ll still have to pay off the full amount of debt you owe; you’re simply making it easier on yourself

How To Get Approved For Debt Consolidation Loans In Canada?

Like with all loans and financial products, it all depends on your unique situation. But, there are things most lenders are looking for, which can help you be prepared when applying for a debt consolidation loan.

If you approach a bank for a debt consolidation loan you’ll need to meet the following requirements:

  • Not have an excessive amount of late payments on your debts
  • No big black marks on your credit report, like credit accounts that are in collections
  • You have an income that’s high enough to handle the loan
  • You don’t have an astronomical amount of debt

We know most of those requirements seem intimidating. But the good news is that getting a debt consolidation loan from a bank is only one of your options. You could instead look into getting a personal loan from a private lender or even ask someone to co-sign a debt consolidation loan.

When Should You Consolidate Your Debt?

Choosing to consolidate your debt with a loan is a big decision, that’s why it’s important to know exactly what’s going on with your finances; here are a few steps you should take before you make any final decisions.

  • First, you need to identify the cause of your increasing debts.
  • Take a look at your debt-to-income ratio, this is the ratio between how much debt you have and how much money you bring in.
  • Don’t forget to also take into account the ratio between your monthly income and your monthly credit card bills.

Once you’ve determined what the main source of your debt is, you need to figure out the best course of action to get your finances back on track.

  • First, determine how long it will take you to pay off your debts if you continue to only make the minimum monthly payment.
  • Now try to create a budget that will allow you to both pay for your daily necessities and make debt payments that are more than the minimum required.
  • If you are unable to create a budget that works then you probably need to consider a debt consolidation loan as an option.

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?

It can be very difficult to get a debt consolidation loan when you have bad credit. This is especially true if your debt to income ratio is also very high. However, you may still be able to get a loan if you provide some collateral or a cosigner.

Will a debt consolidation loan hurt my credit?

A debt consolidation loan can temporarily hurt your credit when your lender performs a credit check during your application process. However, in general, a debt consolidation loan can build your credit because the debt accounts you consolidate will be considered as paid. Moreover, every time you make full on-time payments your credit will positively impact your credit.

What kind of debt can I pay off with a debt consolidation loan?

Credit card debt, payday loan debt, lines of credit, utility bills and other unsecured debts can be consolidated.

Do I need collateral to get a debt consolidation loan?

No, you do not need collateral to get a debt consolidation loan. You can use an unsecured personal loan to consolidate debt. Although, if you have poor credit some lenders may ask you to provide collateral or get a co-signer.

Why was I rejected for a debt consolidation loan?

Being rejected for a debt consolidation loan depends on your unique financial situation. But, common reasons consumers are denied debt consolidation loans are poor credit, too much debt, and not being able to afford the payments. 

Can I get a debt consolidation loan without a job?

In order to get approved for a debt consolidation loan, you need to be able to afford the loan payments. If you do not receive some type of consistent income, you will likely not get approved for a debt consolidation loan.

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.

Caitlin Wood Priyanka Correia Lisa Rennie Bryan Daly Cris Ravazzano Margaret Johnson Kale Havervold Liz Enriquez Sean Cooper Veronica Ott Corrina Murdoch Chrissy Kapralos

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