What is a debt consolidation loan in Canada?

A debt consolidation loan is a loan that pays off multiple smaller loans, credit card balances, or lines of credit all at once.

For example, if you have six different debts to pay (four credit cards, one auto loan, and one payday loan) with various payment due dates and accumulating interest on all loans, a debt consolidation loan helps you combine everything you owe into one loan

Sometimes, debt consolidation loans are unsecured personal loans that don't require any collateral. Other times, they are secured personal loans that require collateral (i.e. car, house, etc.)

Why do people get debt consolidation loans?

The primary reason people get a debt consolidation loan is to secure a reduced interest rate on their debt load and to simplify their debt repayment schedule. Debt consolidation loans give borrowers some much-needed breathing room against accumulating debt. In the right circumstances, you can save a lot of money with this type of loan. 

You don’t necessarily need to have a debt problem to take advantage of debt consolidation loans. If you have an opportunity to replace high-interest rates with low-interest rates, it’s a money-saving tactic that’ll save money in the long run.

Pros and Cons of Debt Consolidation Loans

Before you apply for a debt consolidation loan there are a few considerations to be made. Consolidating debt with a loan is not for everyone. It's important to look at your own situation in depth and weigh up the pros and cons to determine if you want to incorporate this type of loan into your debt management strategy.

Advantages of a debt consolidation loan

  1. Turns multiple monthly payments into one monthly payment.
  2. Offers a manageable fixed repayment schedule compared to what you had before.
  3. Improves your credit rating with on-time payments and helps you acheive a preferable utilization ratio.
  4. Can help you save money if you can secure a lower interest rate.
  5. Available online and you can get fast funds deposited within a day.

Disadvantages of a debt consolidation loan

  1. Best interest rates are normally reserved for good credit customers.
  2. With no collateral, there is less chance of approval or a low interest rate.
  3. With collateral, you may get an approval or low interest rate, but you risk losing the asset if you default.
  4. If the loan is unsecured, your repayment schedule might be shorter and/or interest rate higher. Furthermore, you might not get approved for the amount you need.

When is a debt consolidation loan a good idea?

Lenders calculate your interest rates for a debt consolidation loan by weighing three factors: your credit score, your income, and the collateral (security) you can offer. With this information in mind, a debt consolidation loan might be a good idea for you if…

  1. You don’t have a bad credit rating yet, but you have multiple debts and are struggling to make your monthly payments on time. With good credit, you might qualify for a decent interest rate on a debt consolidation loan. And once you consolidate all debts under the same roof, your monthly payments will be easier to plan for and manage. 
  2. Your credit score is average but you're are determined to reduce your debt load and achieve a better financial standing. A debt consolidation loan will help you improve your credit rating even faster because you’re lowering your credit utilization ratio (that is, the amount you’re allowed to borrow versus how much you’ve actually borrowed). The bigger that gap, the better it is for your credit rating.
  3. You have bad credit but can offer collateral. Your credit rating may not help you secure the best interest rate on a loan, but some type of collateral could offset your bad credit rating. If you want to get a better credit rating and can make the payments on time, getting a secured consolidation loan can help you improve your credit score in as little as a few months.
  4. You have bad credit, multiple debts, and nothing to put up for collateral. You’ll probably get hit with a higher interest rate, but if your calculations indicate that you’ll save even a few hundred dollars, a debt consolidation loan is a viable option. If you do pursue a debt consolidation loan with bad credit, make sure to shop around and compare interest rates to find the best deal for you. You might also want to consider a cosigner. 

When should you NOT get a debt consolidation loan?

A debt consolidation program is a bad idea if you’ll be charged more interest after you consolidate your debt than you’re paying on each individual loan. Unless you can get a lower monthly payment or a lower interest rate (or both) then this kind of financing isn’t for you.

Make sure to do some quick math on your debts with a debt consolidation calculator. While a longer repayment period seems ideal, the APR has to be just right, otherwise, you may end up owing more than before!

Furthermore, you should also not get a debt consolidation loan if you’re not able to trust yourself with getting the money. A debt consolidation loan can provide some much-needed breathing room, but you shouldn’t use it as a crutch to tide you over. If bad habits led you to bad debt, you should be taking other steps to get your spending under control and learn to budget. With some quick education and practical tips, you’ll be managing your money like a pro in no time!

Can I get a loan to consolidate credit card debt? 

Credit consolidation loans are available to clear credit card debt, but a balance transfer credit card is also a helpful tool for this goal. While most credit cards command an interest rate of around 20 percent, balance transfer credit cards offer a lower rate, sometimes even as low as 0 percent for a limited time. 

If you’re burdened by multiple high-interest credit cards, a balance transfer card is a great solution to explore. More of your monthly payments can go to tackling the principal balance and less to paying down accruing interest.

Will I get approved for a debt consolidation loan with bad credit? 

Banks offer debt consolidation loans but it can be a lengthy process to get approved. And if you have bad credit, you may only be waiting for your application to be declined. Many people with bad credit think that they don’t have many options when it comes to consolidating their debts. But online lenders are starting to emerge as dependable alternatives to bank loans. 

With advanced analytics that go beyond credit scores, some online lenders are more flexible than banks when approving loans. If you have bad credit, a cosigner or collateral may be required depending on the amount you need, but unsecured loans are also available. 

A personal loan from an online lender might be the best solution for bad credit borrowers with spiralling debt. With an installment loan, you can combine all smaller debts into a single payment. You can get a fixed repayment schedule that you customize yourself and a reasonable interest rate. Just make sure that your interest rate is lower than the sum of your other debts. You can do the quick math with this debt consolidation calculator.

Beware of debt consolidation scams

Online lenders are emerging as legitimate alternatives to traditional bank loans. Sadly, the debt consolidation industry has a bad reputation due to some scammy, fly-by-night operations. Fortunately, there are ways to tell you’re dealing with a shady lender.

Companies that offer unsecured personal loans with no credit check and/or guaranteed approval are suspect. If they do not have a physical address or contact information either, they are not to be trusted. 

Check out their social media presence and other customer testimonials. Furthermore, you can check out this alert from the Government of Canada’s Financial Consumer Agency on these “services” for more information.

Can debt consolidation help with payday loans? 

It might be a bit late to tell you this, but payday lenders are predatory by nature. They lead many borrowers into a cycle of debt due to incredibly high-interest rates and short repayment periods. A debt consolidation loan (i.e. personal instalment loan) can help you pay off payday lenders and close the cycle of debt for good! 

Do you need help managing your debt?

If you’re looking for free advice on how to improve your financial situation, non-profit credit counselling is an option. While a credit counsellor can’t give you a quick fix in you’re in a jam, they can help you learn vital money management skills to help you get out of (or prevent yourself from getting into) more debt. 

If your debt has completely spiralled out of control, a consumer proposal might also be an option worth considering.

Where can I apply for a debt consolidation loan in Canada?

If you decide that a debt consolidation loan is the best choice for you, Fresh Start Finance offers personal installment loans of up to $15,000 and repayment periods of up to 60 months. As a sister company to one of Canada’s fastest-growing fintech companies (Canada Drives), you can apply with confidence. 

With Fresh Start Finance, there are no application fees, maintenance fees, or hidden costs. Even if you have bad credit, you can apply today in under 5 minutes from the comfort of your home—online or by text message! If approved, we can deposit the money into your account within 48 hours!