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Debt consolidation loans offer a way to lower your interest rates on multiple debts by combining them into one loan. As any financial planner will tell you, one of the trickiest parts of managing your money is dealing with multiple creditors.
Juggling your credit card balance, consumer debts, mortgage and more can be confusing, and chances are good you’re not getting the lowest interest rate possible.
Getting a loan to pay off your existing debts consolidates these obligations under one umbrella, allowing you to save on interest costs by locking in a favorable rate. A debt consolidation loan also means having only one creditor to deal with, which is a much less stressful arrangement for most debtors.
Smarter Loans have assembled a list of online debt consolidation loan options in Canada to help you find an arrangement that works for you.
Our debt consolidation loans comparison table makes it easy to see features of each provider, putting you that much closer to paying off your debts for good.
We can help connect you with the top debt consolidation loan providers in Canada.
In today’s environment, there are many forms of debt available to the average person. These debts can range from short-term credit cards, to medium-term personal loans such as car loans, or even long-term obligations like mortgages on residential properties.
Given this diverse array of debt that one can borrow, it can sometimes get overwhelming to monitor and track the monthly payments, interest rates, and payment schedule for each debt component.
Complicating this is the fact that different debts come with different interest costs, and the need to make multiple payments can lead to higher overall expenses. It’s a common scenario to find oneself needing to consolidate debt just to keep track of everything. This is where an unsecured loan known as a debt consolidation loan comes into play.
One major option used by a significant number of Canadians looking to reduce their periodic payments, lower their interest rate, and decrease the number of creditors they owe money to, is a debt consolidation loan.
This borrowing solution not only allows you to consolidate your debt into single monthly payment, but it can also potentially save money by offering lower monthly payments and possibly a lower interest rate than other debts.
Moreover, it can provide a form of debt relief, helping you to manage your credit cards and other debts more effectively, and potentially paying off the debt faster.
While it is not the same as debt settlement, which involves negotiating a lower balance on your debt, a debt consolidation loan can simplify your financial management and provide a more predictable repayment schedule.
This approach has helped many Canadians regain control of their finances.
In a nutshell, a debt consolidation loan involves a customer taking out one large loan to pay off multiple small debts at once. These loans are typically extended by financial institutions as personal loans that cover all outstanding debts of a person.
Once the borrower has used the immediate funds to pay off his/her creditors, they then pay back the financial institution in periodic principal and interest payments just like a regular loan.
In essence, the smaller debt components get accumulated into one large debt piece that is typically offered at a lower rate of interest, thus providing both financial and efficiency benefits.
It is important to remember that there are two types of debt consolidation loans: secured and unsecured. Secured loans require the borrower, who may be struggling with debt problems, to put up some personal asset as collateral, which can be claimed by the lender in the event of default. This collateral could even include a home equity loan.
Unsecured loans, on the other hand, are not secured on any personal asset, implying a higher risk for the financial institution. This higher risk translates into high interest rates, which may not be favorable for those looking to consolidate their debts for lower monthly payments.
If you’re juggling credit card bills, for instance, and find it challenging to meet the minimum payment on each card, a debt consolidation loan could be a good option. Instead of multiple payments with varying interest rates, you’d have one payment schedule to follow, potentially with a lower interest rate, making it easier to manage and possibly helping you to save money.
However, while these loans can be a useful tool to manage and consolidate your debt, they are not a cure-all for financial mismanagement. The ability to borrow money should be a tool to help manage finances, not an invitation to incur more debt.
Thus, when lenders evaluate potential borrowers who are looking to take out a debt consolidation loan, there are four main criteria that they would use to make their decision: proof of income, credit history, financial stability, and any assets or equity.
They may also consider whether a balance transfer, another method of consolidating credit card debt, might be a more suitable solution for your current situation. Remember, the goal is to lower your monthly payments and simplify your financial management, not to compound your debt problems.
Whether the loan is secured or unsecured, this is the key metric used to determine the borrower’s financial capabilities to regularly meet interest and principal repayments as they come.
A secondary, but equally important consideration is the borrower’s current financial stability. If the borrower can show predictable expense patterns and/or additional sources of income, they are more likely to be approved for the eventual debt consolidation loan.
As with any other personal loan, a higher credit score offers the benefits of more attractive pricing terms to the borrower as the lender has greater confidence in repayment based on historical precedent.
Though most debt consolidations are done on an unsecured basis, offering equity collateral can significantly increase the borrower’s chances of approval and getting a lower rate of interest on the debt consolidation loan. This does have its own risks as explained later in this article.
In terms of what type of debt can be classified as eligible to be consolidated, there are certain parameters set out that vary by financial institution. As a general rule of thumb, the following types of credit are generally able to be merged together as part of the debt consolidation loan:
Credit Card Debt
In Canada alone, there are 3 billion credit card transactions made every year. An Equifax report stated that these originated from 31 million individual accounts, of which 30% didn’t pay back the credit card balance at the end of each month. Annually, this is approximately $7 billion just in interest for late payments.
Public Utility Debt
Public utilities include water (hydro), electricity, natural gas, telephone services and other essentials provided by a specialist provider. Typically, these companies charge the consumer at the end of each month with payments due within 2 weeks. The debt from these can be bundled into a debt consolidation loan.
Other Consumer Loans
Broadly speaking, consumer loans are debts taken out for a multitude of purposes including auto loans, student loans, and other personal loans.
There are several advantages to obtaining a debt consolidation loan. However, most borrowers that consolidate their debt are primarily looking to decrease the interest payments they make per month.
To do this, they rely on the simple fact that debt from credit cards and other consumer loans as mentioned above typically has a higher interest rate tag attached to it. For example, credit cards charge 8-12% on the low end and 23% on the upper end for payments that are made past the due date.
This means that if the borrower is able to receive the debt consolidation loan at a reasonable rate provided by retail banks, he/she can stand to save up to 5% or more on each payment.
There are several pros of debt consolidation loans when compared to alternative forms of debt reduction. These include:
With a debt consolidation loan, the credit rating remains protected as the principal is still being paid back in full to all creditors. In fact, with a disciplined repayment process, the credit rating could actually even improve.
With all payments being bundled into one single payment to one single lender, the borrower streamlines the periodic repayment process to ensure that no payments are missed or forgotten inadvertently.
While credit cards, utility bills, student loans and other forms of short-term debt come with a short deadline for repayment, loans provided by financial institutions are generally longer, which means that coupled with the lower interest payments, the overall monthly repayment amount is substantially lower.
As creditors are all paid out right after the issuance of the personal loan, there is no additional pressure to pay back on accelerated timelines.
While debt consolidation loans, often in the form of a personal loan, provide benefits, remember:
Asset Risk
Secured loans require collateral; failure to make minimum payments can result in asset repossession by the lender, a harsher consequence than late fees with credit card or utility companies.
Curb Overspending
Debt consolidation may lead to a false sense of financial relief, potentially leading to further credit card use and returning to the original debt situation.
Same Principal
The principal amount remains unchanged post-consolidation; only the interest rate might reduce.
Applying for a debt consolidation loan in Canada involves a thorough assessment of your finances. This popular borrowing solution helps Canadians manage their debt more efficiently.
Assess Your Situation
Begin by reviewing your current debt payments, credit card debt, payday loans, and any other outstanding debt. Document your multiple debts, the corresponding interest rates, and your monthly payments. This will help you understand your average interest rate and the total loan balances you owe.
Review Your Credit Report
Check your credit report for any discrepancies and to understand your credit limit. Your credit score can significantly impact the interest rate on your debt consolidation loan. If you have a high credit score, you are likely to secure a lower interest rate, which can help you to pay off your debt sooner.
Choose the Right Loan
Decide between an unsecured personal loan or a secured loan, such as a home equity loan or a line of credit. Your choice will depend on your circumstances, the amount of debt, and whether you have assets to secure against the loan.
Consolidate Your Debts
Once approved, you can use the loan to consolidate credit card debt and other high-interest debts into one manageable payment. Instead of juggling multiple bills each month, you’ll make one monthly payment towards your loan.
Apply for the Loan
Complete the loan application, ensuring you provide all necessary details. Some lenders may require proof of income or other documentation. It’s important to be accurate and honest in your application.
Manage Your Monthly Payment
A significant benefit of a debt consolidation loan is the potentially lower monthly payment, compared to the combined monthly payments of your previous debts. This can free up cash flow and make budgeting easier.
Strategize Your Repayment Plan
With a clear picture of your monthly payment, you can strategize to pay down your debt load more quickly. Making extra payments or paying more than the minimum can help reduce your debt sooner.
Debt consolidation loans can be a valuable tool to manage multiple debts, particularly if you’re dealing with high-interest credit card debt or payday loans.
By combining multiple debts into one monthly payment, you can streamline your finances, potentially secure a lower interest rate, and pave your path towards becoming debt-free.
However, it’s essential to remember that this is not a one-size-fits-all solution, and what works best will depend on your individual financial situation.
Debt restructuring involves renegotiating existing contracts, often chosen by those struggling to repay debt. It can negatively impact your credit score for up to three years.
Conversely, debt consolidation involves drafting a new loan contract to pay off previous debts. It’s beneficial even for those not in financial distress, and timely repayments do not impact your credit score.
Successfully securing a debt consolidation loan is just the beginning of your journey towards financial health. It’s essential to effectively manage your new loan to ensure you stay on track and avoid falling into more debt. Here are some tips for managing your loan post-consolidation:
Remember, the goal of consolidating your debts into a single loan is to make your financial situation more manageable and to pay off your debt more efficiently. It’s not an invitation to accumulate more debt, but a tool to guide you towards a financially stable future.
Obtaining a debt consolidation loan with poor credit isn’t impossible, though it might entail higher interest rates and some diligent searching. To improve your chances and secure lower monthly payments, consider consolidating your credit card debt and settling smaller debts. Lenders assess not just credit scores but also your debt-to-income ratio. By managing to consolidate your debts efficiently, you can access a personal loan to pay off your debt faster, even with bad credit.
Typically, debt consolidation loans, often a personal loan, are unsecured. However, some lenders may require collateral—ensure you understand the loan terms, particularly if your assets are at stake. The downside is that these loans can extend your repayment period, potentially keeping you in debt longer. Lower interest rates aren’t guaranteed and consolidating credit card debts with a higher-interest loan can increase costs. Therefore, review your loan terms carefully before finalizing your decision to consolidate debt.
Many people prefer an unsecured debt consolidation loan. That’s because you are not risking any personal assets, such as your home.
The main advantage of secured debt consolidation loans is that they will get you better interest rates. This is because you are using personal assets as collateral on the loan. The reduced risk for the lender will make them more willing to charge you less.
Amy Orr is a professional writer and editor with over 10 years of experience in the Canadian, U.S. and U.K. financial markets. She has written for numerous publications on topics as diverse as economic literacy, corporate finance, and technical analysis of numerical data. Prior to transitioning to full-time writing, she worked in the hedge fund sector. Her academic background is astrophysics, and she has a Masters in Finance from the University of Edinburgh Business School.
Jenna West is Smarter Loans' in-house financial writer and content director. She has been covering the Canadian FinTech and finance industry since 2017, including financial trends analysis, industry surveys, regulatory updates and changes in Canadian consumer behaviour when it comes to finance.
