Best Debt Consolidation Canada (2022)
Did you know that in January 2021 Canadians owned a collective $74 billion in credit card debt? And that this number was actually down by $16 billion from the beginning of the pandemic? In fact, Canadians paid down non-mortgage-related debt faster than any time in the past thirty years!
Are you too looking to pay off your balances and get out from underneath debt?
Debt consolidation loans can be a powerful tool for getting your spending back under control.
This guide answers common questions about debt consolidation loans in Canada. Learn what debt consolidation is, how it works, why you might consider it and the best debt consolidation lenders for you.
What is debt consolidation?
Debt consolidation is combining multiple debt payments into a single monthly payment. This debt could be almost anything from credit cards and loans to mortgages and private student debt.
When you consolidate debt, a new lender buys your existing debt. It extends a new loan to you, leaving you with a single payment. While it does not make the debt go away, it simplifies your finances and can improve your cash flow.
Getting a consolidation loan at a lower rate than your existing loans allows you to pay off your debt faster and save money on interest payments in the long run.
Good to know
Consider a debt consolidation loan if you have multiple credit card accounts or high-interest loans and want to simplify or lower your expenses.
How does debt consolidation work?
As discussed above, debt consolidation means to combine multiple debts into a single one. It is valuable for saving money. It can lower interest payments and improve cash flow.
Imagine the following situation:
You currently have a credit card with a $7,000 balance and 22% interest and a personal loan with a $5,000 balance at 18% interest. Each month you pay back $300 and $250, respectively.
Here we compare it to two hypothetical debt consolidation loans:
- Loan A: a 2-year consolidation loan at 8%
- Loan B: a 5-year consolidation loan at 8%
|Original debt||Loan A||Loan B|
|Combined interest rate||20.33%||8%||8%|
|Term in years||2.3||2||5|
|Total interest paid||$2,850||$1,026||$2,559|
|Total amount paid||$14,850||$13,026||$14,599|
If you keep the loan as is, you end up paying $2,850 in interest, but a consolidation loan makes a big difference. The shorter loan A saves the borrower $1,824 overall. The longer loan B lowers the monthly payments by $300 while saving $251 in interest.
Want to compare rates yourself? Our comparison tool above makes it easy.
Good to know
It is easy to see how much you would save with our debt consolidation loan calculator.
What is a good interest rate on a debt consolidation loan?
Traditional banks start debt consolidation loan interest rates at around 7%. Alternative lenders start their rates around 13%, but they can range to above 40%.
Rates depend on your financial situation, credit score, the amount borrowed and whether the loan is secured or not. Shop loan offers to get the best rate for you.
When interest rates are lower than what you are currently paying, debt consolidation loans are a powerful tool for restructuring what you owe.
Beware of high-interest loans and work with a lender you trust. Excessive interest can make it difficult to get out from underneath your debt.
Is it smart to consolidate debt?
Debt consolidation is a good option if you can get a lower interest rate than you currently pay on existing loans.
Combining multiple high-interest debt payments into a single one can make paying back debt more manageable. If you have been living paycheque-to-paycheque, it can buy you valuable breathing room.
Beware of consolidating debt at too high an interest rate. Unless you qualify for a low-interest debt consolidation loan, it can cause more harm than good.
Debt consolidation is recommended for people with a good or excellent credit score who struggle with their payments with credit card and other high-interest debt.
Good to know
If you have high-interest credit card debt, consolidating it into a single payment at a lower interest rate can save you money.
Debt consolidation advantages and disadvantages
For borrowers who have several high-interest loans, debt consolidation is usually a good idea. Here is why one may be right for you and what you need to look out for:
Pros of debt consolidation
- Simplify your bills by combining multiple payments into a single monthly payment.
- Lower your monthly payments and improve your cash flow by extending multiple debts into a single longer loan.
- Improve your credit score by paying your debt consolidation loan back on time every month.
Cons of debt consolidation
- Needing to consolidate debt may be an indication of problematic spending. Before taking out a new loan, be sure that you can pay it off. Missed payments negatively impact your credit score and make it more difficult to get future loans.
- Be careful of the interest rate! Some debt consolidation offers are at extremely high-interest rates.
How do I get a debt consolidation loan?
A good place to start looking for a debt consolidation loan is through the financial institutions you already have a relationship with. After first approaching them, compare offers from competing lenders.
The application process works like this:
- Compare rates and terms from lenders. Approach a lender or lenders who best match your situation.
- Next, submit a debt consolidation loan application. Potential lenders will request information about your financial and work situations. The higher your credit score, the greater your chance of having your application accepted.
- The lender will approve or deny your application.
- Check the terms and conditions before you sign.
- When you sign the loan, the lender will pay off your existing debts themselves, or it will deposit the money into your account for you to pay off.
- Starting the following month, you will begin repaying the new loan.
How do I get a debt consolidation loan with bad credit?
Many traditional banks are hesitant to lend to those with a poor credit history. Nevertheless, applicants with poor credit still have options. Specialized lenders regularly work with them. These lenders perceive more risk when lending to someone with poor credit, so their terms and interest rates are less favourable.
Lenders look at not only your existing debt but also your income, the context of that debt, the stability of your employment and other factors.
Good to know
Is a loved one willing to help you? Asking them to be a cosigner can improve your application.
How do I get an online debt consolidation loan?
Getting an online debt consolidation loan follows the same process as getting a loan from a brick-and-mortar bank. You apply, they evaluate you, and then you sign if you agree with their terms. They will pay off the existing debts while extending a new loan to you.
Our debt consolidation loan comparison tool above can help you anonymously compare rates in just seconds.
What are the differences between secured and unsecured debt consolidation?
Both secured and unsecured loans have their place. Unless rolled into a home equity line of credit, most personal loans are unsecured in Canada. Continue below to see how they compare.
What are secured debt consolidation loans?
Secured debt consolidation loans are backed by collateral. The recipient pledges an asset such as a home, vehicle or property in exchange for the loan. This is how a traditional car loan or mortgage works. If you stop paying it off and the bank will repossess your vehicle or house. With a debt consolidation loan, you risk losing the pledged asset if you do not pay.
An example of a secured debt consolidation loan is a home equity line of credit, or HELOC. A HELOC allows you to tap into the equity you have built into your home to get a low-interest rate on a large revolving line or credit. HELOCs frequently go towards debt consolidation or funding a project.
Here are some advantages and disadvantages of secured loans:
- Larger loans available
- Low interest rates
- More time-consuming to sign
- You risk losing your collateral if you do not pay
What are unsecured debt consolidation loans?
Unsecured debt consolidation loans are loans that are not backed by collateral. They are more common because they are easier for lenders to offer. They are quick to approve, but interest rates are higher. They can be more difficult to obtain for borrowers with poor credit, particularly at a beneficial interest rate. Failing to pay off this loan may result in your being sued by the lender and having your debt sold to a debt collector.
What are the advantages and disadvantages of unsecured loans?
Here are some advantages and disadvantages of unsecured personal loans:
- Quick approval
- A good option for borrows with excellent credit
- Can be difficult to obtain with poor credit
- High interest rates
- Smaller loan amounts are available
Does debt consolidation hurt your credit?
Paying off a debt consolidation loan will actually help to improve your credit.
Debt consolidation is not in and of itself damaging to your credit. Your outstanding debt and payment history are already on your credit report if you are considering debt consolidation. High credit usage and a history of missed payments may have brought your credit down. It can take time to bring a credit score back up. A debt consolidation loan helps by reducing your debt-to-income ratio and improving your cash flow. If it keeps you from defaulting on a payment it is a huge plus!
Consumer proposal vs debt consolidation
Both consumer proposals and debt consolidation can provide a borrower with financial relief. While debt consolidation makes an existing debt more manageable and can lower monthly payments, a consumer proposal discharges some, though not all, debt. It is an alternative to bankruptcy that allows you to keep your assets.
Consumer proposals are damaging to credit. They remain on your credit report for three years after your last payment. It is difficult to obtain future loans with the consumer proposal on your credit report.
In a consumer proposal, a Licensed Insolvency Trustee (LIT) will work with you on a plan to settle your debt. The LIT submits a proposal to your creditors, who have 45 days to accept or reject it. If they accept, you will be required to pay off a percentage of your previous debt, attend two financial counselling sessions and adhere to other terms and conditions dictated by the agreement. In exchange for making your consumer proposal payments, you will be legally released from your debts.
If it is not accepted, your LIT can change and resubmit the consumer proposal. If no solution can be found, you may have to declare bankruptcy.
Bankruptcy vs debt consolidation
Both bankruptcy and debt consolidation can provide a borrower with financial relief. They are, however, fundamentally different. As explained above, debt consolidation is a restructuring of your debt into a single payment. Under the right conditions, it can improve your cash flow and make paying off debt more manageable. It may even improve your credit.
Bankruptcy, on the other hand, should be considered a last resort. It is a legal process that has ramifications for years to come. It is what happens when you have no other options for paying your debts.
In bankruptcy, you can discharge your debt, but be aware of the following consequences:
- It has a disastrous impact on your credit. It will remain on your credit report for six or seven years! If you have had past bankruptcies, it stays for 14 years.
- While the bankruptcy remains on your credit report, it will be extremely difficult to find credit.
- A LIT may sell off your assets to reimburse what it can to your creditors.
- If your future income exceeds a specific amount, you may be required to make payments to your LIT.
- It could make it harder to find a new job. Employers have the right to require a credit report as a condition of offering you a position (with your signed consent). Bankruptcy can mean missing out on an offer, particularly for government or finance jobs.
How does student debt consolidation work?
Rising tuition costs mean that students need to borrow more than ever before to attend university in Canada. Students typically finance their education through a mix of federal loans from the Canada Student Loan Program, provincial loans and private loans.
Students tapping into both federal and provincial loans may have their loans consolidated automatically depending on their province.
- New Brunswick
- Newfoundland and Labrador
Not consolidated, reimbursed separately
- British Columbia
- Nova Scotia
- Prince Edward Island
Nunavut, The Northwest Territories, Quebec and Yukon have their own programs for student loans.
Federal and provincial loans are publicly administered. They are offered at low-interest rates with flexible terms, including a six-month grace period after leaving school. A student would be unlikely to consolidate this public debt into a private debt with more restrictive terms. While technically possible, it would mean owing money to a bank instead of to the government.
Private student debt via a loan or a line of credit is a more likely candidate for a debt consolidation loan. It works like other debt outlines in the article above.