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Debt Consolidation Loans: Facts, Considerations, Other Options
What is Debt Consolidation?
Debt consolidation is a financial strategy that combines multiple debts — like credit cards, personal loans, or lines of credit — into a single payment each month. Rather than tracking many bills with different due dates and interest rates, you simplify your obligations into one payment, which can make managing your money easier and help you stay on track. Depending on the method used, debt consolidation can also potentially reduce the total interest you pay over time.
One option to gain back control of your finances is to seek out a debt consolidation loan. This can combine all of your debts into one payment. The question then becomes, is a debt consolidation loan the right move for me?
Despite making regular payments the statement balances are either staying the same or maybe even going up a little bit. No matter the type of debt, whether it be credit card debt, income tax debt or other types of debt, it’s always better to get ahead of this problem than wait until the collection agencies start calling.
Applying for a debt consolidation loan is a good option to explore when you realize that you have too much high-interest debt. Trying to pay off the individual debts that have high-interest rates can become impossible. The high-interest rates mean that any payments you make are only paying interest with little reduction to the actual loan balance. This makes you a good customer for the lender because they are making money off of you. Debts that fall into this category include:
- Credit card debt with banks
- Credit card debt with other lenders
- Payday loans
- Installment loans
- Income tax debt
We provide a complimentary financial assessment where we can review your financial situation and assess whether a debt consolidation loan is a viable option for you. We can advise you of the documentation you will need to organize and which lenders to approach and who to avoid.
Try Your Bank First
The typical place to apply for a debt consolidation loan is your bank or credit union. You may have been banking with them for a long time and they are familiar with your finances. If approved, you can use the funds to pay off all of the individual debts and be left with only one new loan to pay. The best things about qualifying for a consolidation loan is you will have:
- Reduced the overall interest rate that you are paying
- Reduced the number of different payments you make monthly down to one
- Perhaps reduced the overall amount of dollars that you are paying out monthly.
- Made your financial life simpler
Pro tip: be especially careful about what amount of interest and fees that you are being charged on the debt consolidation loan. A debt consolidation loan may not be the right move for you if the monthly payments or the interest rate is too high. Generally, you want the interest rate to be much, much lower than what you are currently paying on your other debt.
Challenge to Get Approved
Applying for a debt consolidation loan is one thing. Getting approved for one is another. There are many possible reasons why you may not be approved for a new loan:
- Your credit score is not good. This may be because of several earlier missed or late payments.
- Your income is too low
- Your income has not been steady. The lender may want to see you have consistent income over a period of time before a loan will be approved.
- You owe income tax debt. This seems to make lenders uneasy and unwilling to loan as they may feel you will get back into debt again with Revenue Canada.
- You have not filed your income tax returns. See point number 4.
- The lender requires that you have a cosigner and you don’t have one.
- The lender wants some collateral to secure its loan and your assets don’t qualify as valuable enough.
Other Considerations
Even if you have been approved for a debt consolidation loan, there are some other things to consider before you sign on the dotted line. For instance,
- Your monthly cash flow – will the monthly payment required actually provide you with some relief to your monthly cash flow? We have seen some debt consolidation loan payments still be too much to handle.
- How long will it take for you to pay it off? Once approved, realize that you are required to pay back all of your debt plus interest to the new lender. Take a good look at the repayment schedule and note what year the last payment is to be made. If that date is too far in the future you might want to reconsider.
- Are you still running a deficit in your household budget? For that matter, what is a deficit? A monthly deficit exists if you are spending more than you are making each month. This results in a gap that must be met with even more debt. This could mean you are building up new credit card debt or missing payments on your phone or other utilities after you receive the debt consolidation loan funds. In order for any debt solution to work, your household budget cannot run at a deficit.
There are Debt Relief Choices
Maybe you have applied for a debt consolidation loan and been rejected. Or maybe you have applied, been accepted, but are still uncomfortable with the terms of the loan. The interest rate could still be too high or maybe the payment will not provide enough breathing space in the monthly budget. You might be thinking to yourself, is a debt consolidation loan the right move for me? Well, you should be aware that there are other debt-relief options available that may fit your situation better.
Before any big decision is made, we feel that it is important to get all the important information. As an independent office, we have the freedom to take as much time with you as you need in order to make an informed decision. In regards to dealing with debt, we offer a complimentary, confidential, no hassle appointment where we will take a look at your situation and offer you this information. Our experienced staff can help find you a debt relief option that fits your budget and will cost you less per month than the debt consolidation loan.
What is a Debt Consolidation Program?
A debt consolidation program brings several outstanding debts together under a single repayment arrangement. Instead of managing multiple minimum payments and interest rates, you make one scheduled payment designed to fit your budget. Depending on the specific program, you may benefit from lower monthly payments, reduced interest, or extended repayment terms.
Programs can range from formal solutions negotiated through credit counsellors or Licensed Insolvency Trustees to financial products offered by banks and lenders. A good debt consolidation program not only simplifies payments but also helps you stay accountable to a disciplined repayment schedule.
Types of Debt Consolidation
Here are some of the most common ways people consolidate their debts:
Personal Loan
A personal debt consolidation loan is a fixed-amount loan used to pay off multiple unsecured debts. You receive a lump sum from a lender and use it to settle high-interest balances such as credit cards. Then you repay the new loan over time, typically at a lower interest rate than what you were paying before, and with a single monthly payment.
Balance Transfer Card
A balance transfer involves moving one or more credit card balances onto another card, often with a low or 0 % introductory interest rate for a set period. This can save on interest and reduce your overall cost if you pay down the transferred balance before the promotional period ends. Balance transfers make sense when you can aggressively pay down the debt within the low-interest window.
Home Equity Line of Credit (HELOC)
A HELOC lets you borrow against the equity in your home to pay off other debts. Because it uses your house as collateral, interest rates are often lower than unsecured options. However, this also means your home is at risk if you miss payments, so it’s important to weigh the risk carefully.
Debt Management Plan
A debt management plan is arranged through a non-profit credit counselling agency. Under this option, your counsellor negotiates with your creditors to combine your debts into a structured repayment plan. You make one monthly payment to the counselling agency, which then distributes payments to creditors. While you typically repay 100 % of the debt, interest rates may be reduced or frozen.
Government Regulated Options
The Government of Canada recognizes that Canadians from coast to coast can need to reset their finances rather than be stuck in a cycle of never-ending interest payments. To that end, the government has approved two options which they regulate.
The most popular government-approved option is a Consumer Proposal. This is a method of debt consolidation which is filed via a Licensed Insolvency Trustee (LIT). A Consumer Proposal will allow you to consolidate your unsecured debt into one monthly payment that actually fits your monthly budget. Lastly, during the Consumer Proposal process, your unsecured creditors are not supposed to contact you so there is peace and quiet.
If the monthly payments required to do a Consumer Proposal are still too much, the Government of Canada has also allowed for a person to gain debt relief via the bankruptcy process. Again, this must be filed by a LIT. While some may find that the word bankruptcy is scary, it can be the most practical, fastest, least expensive way to obtain debt relief so that you can get on with your life.
Frequently Asked Questions
Will debt consolidation lower my interest?
Often, yes. Options like personal loans, balance transfers, or HELOCs can offer interest rates below those on high-interest credit cards, which can reduce the total cost of your debt over time.
Will debt consolidation improve my credit score?
Debt consolidation doesn’t automatically improve your credit score — but by simplifying payments and lowering interest, it can make it easier to avoid late payments, which does help your score in the long term. However, some methods (like closing accounts after a balance transfer) can temporarily affect your credit mix or utilization.
Is a debt management plan the same as a consolidation loan?
No. A debt management plan is not a loan — it’s a negotiated repayment arrangement through a credit counselling agency. A consolidation loan, on the other hand, is a new loan used to pay off existing debts.
Are there risks to consolidating debt?
Yes. Secured options like HELOCs put your home at risk if you fall behind. And if you don’t address the spending habits that led to debt, consolidation can simply delay the problem.
How do I know which type is right for me?
The best method depends on your income, debt amounts, credit score, and financial goals. Speaking with a Licensed Insolvency Trustee or accredited credit counsellor can help you compare options and choose the one that aligns with your long-term financial health.
Contact Us
Please feel free to contact us to set up a meeting in person, by phone, or online in order to discuss your debt relief options.