What is a Debt Consolidation Loan in Canada?

 A debt consolidation loan is a loan that pays off multiple loans, credit card balances, or lines of credit all at once. Sometimes, they’re unsecured personal loans that won't require any collateral. Other times, they are secured personal loans that require a piece of collateral. Think of debt consolidation loans like planning get-togethers with your friends or family. Getting everyone under one roof, instead of going out with each one of them individually, is usually more cost-effective. It easier to bring everyone together and spend your resources on one party, than to spread it out.

Why do people get Debt Consolidation Loans?

 The primary reason people get a debt consolidation loan is to get a reduced interest rate and for the ease of paying off your debts on only one loan, instead of several loans. It simply streamlines their debt repayment and, in the right circumstances, end up saving them money.

 You don’t necessarily need to have a debt problem to take advantage of Debt Consolidation loans either… Whenever you can replace high-interest rates with low-interest rates, it makes sense and you’ll save money in the long run.

Beware of Debt Consolidation scams

 Sadly, the debt consolidation industry has a bad rap due to how many scams there are. Some companies will say they’ll manage your debt for you, but it’s for a fee (so are you even saving any money?). Some are fly-by-night operations. Look at their BBB rating online, their social media presence and other customer testimonials. Check out this alert from the Government of Canada’s Financial Consumer Agency on these “services” for more information.

Pros and Cons of Debt Consolidation Loans

Advantages of Debt Consolidation Loans

Disadvantages of Debt Consolidation Loans

Can improve your credit rating by increasing credit utilization percentage

Less chance of approval/low-interest rate if you don’t have collateral to put up to guarantee the loan

Lump all of your loan payments into one easy payment every month, two-weeks or week. While it doesn’t reduce your debt-load, the ease of repayment has improved.

If you do guarantee the loan, you risk losing the physical asset if you default on your loan

Lower interest rate, so you can pay off your principal faster (if you can be approved for a lower rate)

If unsecured, the repayment time is shorter and may not benefit you in the long run

If unsecured, you may not be approved for the amount you need, if it’s several thousand.

When should you get a debt consolidation loan?

You should get a debt consolidation loan if…

  1. You don’t have a bad credit rating, (yet) but you’re neck-deep in debt and having trouble making your monthly payments on time. If you’re not even able to cover the minimum, having one-lump-sum every month will give you greater control. If you have multiple loans and credit cards with high interest, you may feel you’ll never get ahead on paying down the principle.

  2. You have decent credit, but you want to improve your financial situation in general and have something valuable to put up as collateral. If you’re responsible with your money and have never (or very rarely) made a late payment on any of your debts, getting a secured debt consolidation loan can actually get you closer to your financial goals. Having 3 credit cards with varying interest rates in the low-to-mid 20%’s and consolidating to 1 loan with the same payment every month with an interest rate of 11% will get you paying off your loan faster AND saving you money in the long run - potentially thousands depending on your debt-load! Just make sure you are on time, or you risk losing your physical asset. Another bonus? You’ll improve your credit rating even faster because you’re lowering your credit utilization ratio (that is, the amount you’re allowed to borrow vs how much you’ve actually borrowed). The bigger that gap, the more positive of an impact it has on your score.

  3. You have bad credit and want to improve your rating, and have something to put up as collateral. Your credit rating may not give you the best interest rate on the loan, but your collateral could take the edge off. Like #2, if you want to get a better rating and can make the payments on time, getting a secured loan can help get your rate climbing in as little as 6 months. Some companies even have credit-improving programs alongside their debt consolidation loan.

  4. You have bad credit and have nothing to put up for collateral, but want to get your spending and debt in check. You’ll probably get hit with a higher interest rate, but if you can afford it and you come out, in the long run, saving even a few hundred dollars, you’re better off getting a loan than not. If your biggest concern is just being a better money-manager, then the lump-sum payment will help you breathe much easier, even if dollar-wise, you may not come out that much more ahead later. If you find yourself in this boat, make sure to shop around for the best rates. Just be careful to not actually apply to all of them - that will ding your already-pained credit score. If this is you, your best option is to cancel your credit cards once you've paid the balance down with the loan. For some people, having that freed-up space is too tempting. Do yourself a favour and just close them. Yes, your credit utilization will be affected, but would you rather have that or have the risk of doubling your debt?

When should you NOT get a Debt Consolidation loan?

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

You should also not get debt consolidation loan if you’re not able to trust yourself with getting the money. Be honest with yourself and your own strengths and weaknesses with money. Don’t consider it as “more money to spend”, otherwise it will hurt you more in the long run.

Make sure to do the math on your debts. While a longer repayment period seems ideal, the interest rate has to be just right, otherwise, you may end up paying back even more than if you left your loan unconsolidated!

Do you need help managing your debt?

We encourage responsible money management. 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.

How to get the best Debt Consolidation loans in Canada?

If you think a debt consolidation loan is the right choice for you, Fresh Start offers personal loans of up to $15,000 and repayment periods of up to 60 months. We’re Canadian-made and true-north, through and through. As a sister company to one of Canada’s fastest growing fintech companies, you can apply with us in confidence.

Apply today in under 5 minutes from the comfort of your home, either online or even by text message!

Click here to get started.