Debt Consolidation Loan Calculator

Did you know that the average Canadian student leaves education with over $26,000 of debt? That is the starting position for many young adults and that is before they take out mortgages or even enter the job market.

When inflation rises, pushing up the cost of essentials like food and rent, people find it harder to stay on top of debt repayments. If the worst should happen and you are unable to make payments what happens? This guide will explain one solution to this problem, show you how it works and weigh up its pros and cons against declaring bankruptcy.

What is debt consolidation?

Debt consolidation is when you take out another loan to cover loans that you cannot afford to repay.

This new loan replaces the old loans and can be with your credit union, bank or with a separate financial institution. The new loan should offer terms that are more favourable to you, the borrower. These favourable terms might include:

• a lower monthly payment
• a lower interest rate

Lenders are often willing to accommodate debt consolidation if they do not see another to recoup their loan.

How do I use the debt consolidation calculator?

To use the debt consolidation calculator you need to know the terms of the new loan you are considering taking out. First, you input the total amount you will owe, then the repayment schedule and the interest rate.

The calculator will tell you how large your payments will be and how long you will be paying off the loan. This can be very useful for budgeting and financial planning. You will be able to see how much money you could save if you were no longer paying multiple creditors.

How does debt consolidation work?

Essentially a new lender buys your loan from your previous creditors. This allows the previous creditor to pay off at least part of the money you owe them which they prefer to not being paid at all (if, for example, you were to declare bankruptcy). The new lender makes money because the money you will pay them back for the new loan is more than the amount they bought your debt for.

Once the terms of the new loan are arranged, you will make monthly payments to a single creditor. As well as having potentially better terms, this also simplifies matters hugely!

Is debt consolidation a good idea?

When is it a good idea to consolidate debt? The crucial thing to remember about debt consolidation is that it does not reduce the amount you owe. At best it can reduce the interest rate or extend the period of which you have to pay it back (meaning smaller monthly payments). Debt consolidation, therefore, is for people who can pay back their debts but cannot at this moment and therefore are trapped by ever-accruing interest. Debt consolidation is a renegotiation of debt to gain more favourable terms. It is not a renegotiation of the amount of the debt itself.

Therefore debt consolidation is a good idea for people who have taken on debt with unfavourable terms or who are having a temporary financial problem. If you are unable to pay off the debt and unlikely to ever be able to you should consider a consumer proposal or declaring bankruptcy. Let's take a look at some examples.

Melvin, 25, made some reckless decisions when he was a student in BC. He signed up for a credit card so he could spend a month in India without properly reading the terms and conditions. He also got into a bad habit of shopping for expensive trainers using buy now pay later schemes. Melvin's problem is that he has loans with inflated interest rates and short repayment schedules. By consolidating his debt he can have longer to pay off his loans and also reduce the predatory interest rates that he unwittingly signed up for. Melvin would benefit from consolidating his debt - as long as he properly reads the contract this time!

Gregory, 60, from Prince Edward Island, is a different case. Gregory has worked most of his life as a production technician in the aerospace industry. He has a mortgage and a bunch of credit card debt that he racked up taking his children on holidays to Europe. Unfortunately, Gregory lost his job in a recent round of redundancies and the debts which seemed manageable when he was working full time are now far in excess of anything his pension and benefits can handle. At his age, Gregory is at a disadvantage looking for another full-time job. A renegotiation of interest rates or repayment terms will do little to change the reality that he is unlikely to earn enough money again to pay off the debts. Gregory would probably not benefit from consolidating his debt. Gregory should consider settling his debt or declaring bankruptcy.

What is a good interest rate on a debt consolidation loan?

Debt consolidation loans can have very different interest rates, from 3% to 45%+

The amount of interest is something you should consider carefully when choosing who to consolidate your debt with and will depend on factors like your age, your credit rating and the length of the repayment terms.

To make sure you get the best deal remember to always read the contract fully, in close detail and at least twice!

Does debt consolidation work with bad credit?

Banks are usually reluctant to give any kind of loan to someone with bad credit and a debt consolidation loan is no exception. A debt consolidation loan is made on the understanding that you will be able to pay off your debts and it is just the conditions holding you back.

A bank will therefore judge if they believe you are capable of paying off the loan before they agree to it. Your credit, as well as your age and employment prospects, will feature heavily in the decision process.

There are two possible solutions to having bad credit.

• You can persuade someone else to cosign the loan. This means that they will be taking on the risk for your debt too. You should not let someone cosign with you unless you are confident you will be able to repay the loan.
• Certain alternative lenders may be prepared to offer you debt consolidation online despite your bad credit. Be aware that as they are taking on more risk they will expect you to repay at a higher interest rate.

Who offers debt consolidation?

Most traditional banks and credit unions offer debt consolidation. Here is a list of services from well-known names:

• TD debt consolidation
• RBC debt consolidation
• Scotia Bank debt consolidation
• BMO debt consolidation

There are also loan companies that specialize in consolidating debts. You may be able to find more favourable terms with these companies or they may offer you a loan when you have been turned down elsewhere. Always remember to read contracts closely to avoid any surprises further down the line.

Ready to start comparing offers?

Is debt consolidation bad for your credit rating?

No. Unlike bankruptcy, debt consolidation itself is not bad for your credit rating so long as make your monthly payments.

This is a good argument for seeking debt consolidation as soon as you realize that you might not be able to make payments. If you miss payments (for your original loans or your new consolidated loan) you will lower your credit score.

As soon as you think you might be unable to make your monthly payments it's time to start planning how to solve the problem. If you can consolidate your debts before you miss a payment you have the best chance of getting favourable terms for the debt consolidation. Use the calculator tool now to see how much you could potentially save.

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Alexandre Desoutter

Alexandre Desoutter has been working as editor-in-chief and head of press relations at HelloSafe since June 2020. A graduate of Sciences Po Grenoble, he worked as a journalist for several years in French media, and continues to collaborate as a as a contributor to several publications.