What is a debt consolidation loan in Canada?

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

For example, if you have four different debts to pay (two 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.

Even if you can't get a lower interest rate with a debt consolidation loan, it's still a useful tool because it combines multiple payments into one and it helps you transition from revolving credit (credit cards) into installment credit (personal loan). You just need to make sure that you're not paying more interest overall. You can do that with a debt consolidation calculator.

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. If you have poor credit, you need to weigh up the pros and cons to determine if you want to incorporate this type of loan into your debt management strategy.

Pros 

Cons

1. Turns multiple monthly payments into one monthly payment.

1. Best interest rates are usually reserved for good credit customers.

2.  Reduces your reliance on revolving credit.

2. You might pay more interest overall with a debt consolidation loan

3. Improves your credit rating with on-time payments and a better utilization ratio.

3. With collateral, you risk losing the asset if you default.

4. It can help you save money on late fees, interest, etc.

4. If the loan is unsecured, you might not get approved for the interest rate you want or the amount you need.

5. Available online.

When is a debt consolidation loan a good idea?

A debt consolidation loan is a good idea if... 

You can secure a lower interest rate. One of the main goals of a debt consolidation loan is to save money. If you can consolidate your debt at a lower interest rate than what you currently pay on your current combination of loan products (credit cards, high-interest loans, car loans, etc..) then it might be the right solution for you. But with bad credit, getting approved for a low-interest loan is a challenge. However, if you can offer collateral or a strong cosigner (a trusted friend or family member agrees to pay your loan in the event that you cannot), you might be able to secure the interest rate you want.

But even if you can't secure a better interest rate due to bad credit, a debt consolidation loan is a good credit-building opportunity and worth considering if... 

  1. You're in serious debt due to credit cards. A debt consolidation loan can ease the transition from revolving credit to installment credit. This type of loan will help you improve your credit rating too because you’re lowering your credit utilization ratio (your total credit card balances versus total credit card limits). The bigger that gap, the better it is for your credit rating.
  2. You keep missing payments. Payment history accounts for over 35% of your credit score which means missing payments is the easiest way to damage your credit rating. Combining all payments into one single payment will make it easy to keep track of your monthly loan commitments.

Monthly Payment Schedule (Before Debt Consolidation)

Monthly Payment Schedule (After Debt Consolidation)

14th: $200


25th: $500

21st: $150

24th: $100

27th: $50

 

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 monthly payment or interest rate that at least equals what you're currently paying, this type of loan is not a valid solution 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!

Remember, 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%, 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 a personal installment loan, you can combine all smaller debts into a single payment and enjoy a fixed repayment schedule that you customize yourself. Just make sure that your interest rate is lower (or at least equal to) 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 get the breathing space you need to 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!