Skip to content
If you’re struggling with debt, you’re not alone. The average Canadian household carries $22,321 in consumer debt, excluding their mortgage.1 Juggling multiple due dates and interest rates for credit cards, loans, and lines of credit can feel overwhelming. Debt consolidation can simplify your finances and potentially lower your interest costs, making it easier to pay off what you owe.
Here we outline everything you need to know about debt consolidation in Canada so you can decide if it’s the right debt solution for you.
What is Debt Consolidation?
Debt consolidation is when you combine multiple debts into one monthly payment. Instead of trying to balance multiple debts, each with its own interest rates, payment dates, and minimum payments, you only have to worry about one.
There are two main approaches to debt consolidation – you can take out a new loan to pay your existing debts, or you can work with a professional to restructure your debts into a single payment plan.
How to Consolidate Debt
If you decide debt consolidation is right for you, here’s how it works. You take out one big loan and use it to pay off your debts. There are several different ways you can do this.
Debt consolidation loan
You can consolidate debt with a personal loan, a debt consolidation loan, or a home equity loan. Ideally, you want to qualify for a loan with a lower interest rate and one that’s large enough to cover all of your high-interest debts.
With a loan, you’re typically given a lump sum amount that you can use to pay off your debts. Then, you can focus on making one set payment, which includes interest and the principal, every month.
Balance transfer credit card
With a balance transfer credit card, you can move debt from multiple high-interest credit cards onto a balance card with a low or 0% promotional interest rate. Promotional periods typically last six to eighteen months.2 If you can pay off the majority of your debt during this period, you can save a lot of money on interest. But you’ll typically need a good interest rate to qualify for the best balance transfer cards.
Most balance transfer credit cards also charge a balance transfer fee, which generally ranges from 1% to 5% of the transfer amount. If you want to transfer a $5,000 debt with a 3% transfer fee, it will cost you $150. You’ll want to make sure your potential savings outweigh the cost of the transfer fee.
Line of credit
Another option is a line of credit, which can include a personal line of credit or a home equity line of credit (HELOC), if you’ve built up enough equity in your home.
A line of credit works similarly to a credit card. You can borrow money up to your maximum credit limit, and you’re only charged interest on the money you use. While you have to make interest payments every month, you get to decide how you want to pay off the principal balance. If you’re not disciplined in how you pay off your balance, you may find it challenging to pay off your debt.
Debt management program (DMP)
In a debt management program, you work with a credit counsellor who negotiates with your creditors to consolidate your debts into a single payment plan. You typically have to pay the entire balance of your debt, but your counsellor might be able to negotiate a reduction in interest payments or fees. A DMP is voluntary, so your creditors do not need to accept these terms.
Before you agree to participate, make sure you ask your credit counsellor to explain all of the costs. Fees for a DMP are not regulated and can vary. Also, know that when you participate in a DMP, it will damage your credit score and stay on your credit report for two years after it’s complete.
Consumer Proposal
A Consumer Proposal is a formal, legally binding process that can consolidate your debt and reduce your debt payments.
In a Proposal, you work with a Licensed Insolvency Trustee to develop an offer to pay a percentage of your debt, extend the time you have to pay, or both. If your offer is accepted, you have to make a monthly payment to your LIT. Unlike the other debt consolidation options, a Consumer Proposal is the only one that actually reduces the amount of debt you have to repay.
A Consumer Proposal will cause your credit score to drop and will stay on your credit report for three years after you complete the proposal, or six years after you sign, whichever is sooner.
Who Should Consider Debt Consolidation?
While debt consolidation can be a useful option for many Canadians, it’s not always the right fit for everyone. Here are some of the factors that can help you decide if it’s right for you.
● High-interest debt. If you’re carrying multiple high-interest debts, debt consolidation can make it easier to manage repayment. If you only have one or two low interest debts, it might not make sense to consolidate.
● Credit score. Having a good credit score will increase your chances of qualifying for a debt consolidation product that has a lower interest rate. If you have a poor credit score, you might only qualify for an interest rate that’s higher than your current debts.
● Current on payments. If you’re still keeping up with your debt payments and none of them have gone to collections, debt consolidation might be a good option, especially if you have a consistent, reliable income. If you’ve missed multiple debt payments and aren’t able to pay your bills on time, speak to a Licensed Insolvency Trustee (LIT) about more formal debt solutions, like a Consumer Proposal or Bankruptcy.
Pros and Cons of Debt Consolidation
As with any financial decision, there are benefits and challenges to consider with debt consolidation. Here are some of the top pros and cons to consider.
Pros of debt consolidation
● Simplified debt repayment. Focus on one monthly payment instead of many.
● Lower interest rate. Many consolidation options offer lower interest rates than credit cards, allowing you to save on interest charges.
● Regular payment schedule. Knowing you have one consistent payment each month makes it easier to budget.
● Improve credit score. Debt consolidation can help improve your credit score if you make your payments on time and reduce the number of high-balance accounts you have.
Cons of debt consolidation
● Upfront fees. Depending on how you consolidate your debt, you may face some initial costs, such as balance transfer fees or loan origination fees.
● Higher interest rate. If you have a low credit score, you might not qualify for a loan that offers a lower interest rate than your current debts. This would make consolidation pointless or even more expensive.
● Inadequate loan size. Again, depending on your credit score, you might not qualify for a loan or balance transfer card that’s large enough to consolidate all of your debts.
● Damage to your credit score. If you miss your debt consolidation payments, this can lower your credit score. A DMP or Consumer Proposal, will damage your credit score and you will have to rebuild.
Consolidate Your Debt: Speak to a Licensed Insolvency Trustee
If you’re not sure which debt consolidation option is right for you, or if you have questions about a Consumer Proposal, speak to one of our Licensed Insolvency Trustees. We can explain all of the debt relief solutions available and help you decide which one is the right fit.
You don’t have to deal with your debt alone; we are here to help. For a free, no-obligation consultation, call us at 1-888-371-8900, or complete our online contact form, and we’ll reach out to you.
