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This article has been updated from a previous version.

Managing multiple debts can be a challenging task, especially if you’re juggling various payment dates. And if you're only able to make the minimum payments, freeing yourself of debt can feel like an impossible task.

Debt consolidation may be the solution: a loan that puts all your loans together, often at a lower interest rate.

But not all consolidation plans are the same. Here's what to consider when thinking about debt consolidation, as well as a handy calculator to help you decide if it's the best option for you.

Types of debt consolidation

There are a few ways you can consolidate your debt in Canada. Here are some options that can help you regain control over your finances:

Debt consolidation loan

In a typical debt consolidation process, your bank or credit union will loan you a lump sum of money to pay off all your outstanding debt, including your credit cards and personal loans.

You then pay off the single loan over a set term outlined in your contract with the lender. Typically, there’s no associated fees, and the interest rate is usually lower than what you pay on a standard credit card.

Factors such as your credit score, net worth, history with the lender, any collateral and market conditions can influence how high or low the interest rate you're offered is.

Home equity loan or a second mortgage

If you own a home, debt consolidation may also be achieved through home refinancing. This is using part of the equity in your home. Some lenders call this a second mortgage. The borrower typically receives all the money in a lump sum.

Getting a second mortgage can have serious drawbacks. The biggest one being the risk of foreclosure. If you fail to keep up with your payments, it may put your home in foreclosure, considering it’s a secured loan and your home is collateral.

Home equity line of credit (HELOC)

A HELOC is a revolving, secured credit form that uses your home as collateral. It works by unlocking the equity you’ve built up in your home. It operates similarly to other lines of credit, allowing you to borrow money, pay it back, and borrow again up to a maximum credit limit. The interest rates are often variable and lower than credit cards or personal loans.

While HELOCs are popularly used for home renovations by homeowners, they can also be used to consolidate personal debt.

Line of credit (LOC)

You can use a line of credit or overdraft to borrow funds to pay off your higher-interest debt. Like a credit card, LOCs are a form of revolving credit, so it remains open, even if you pay off your balance. You only have to make a minimum payment each month – however, you will still have to pay interest on the balance you’re carrying. Interest rates can vary, but typically they're lower than most standard credit cards. Before opening an LOC, make sure you're committed to paying off all your debt - it can be easily used to rack up more debt if you're not careful.

Balance transfer credit card

With a balance transfer credit card, you can transfer all your high-interest credit card balances from one or more existing cards to a new card that offers either 0% or a very low interest rate. Some cards offer promotional periods offering 0% interest which can help you pay down the principal amount quicker.

If the options above don’t fit your unique situation, credit counselling societies can help you through other options like a debt management program, consumer proposal or debt settlement. These are typically more structured arrangements with legal consequences and require consultation with a licensed advisor.

Related: How to read your credit report

What debts can you consolidate?

Debt consolidation helps you manage multiple debts and simplify your payments — often with lower interest rates.

Here are the types of debts that can be consolidated:

  • Credit card debt
  • Personal loans
  • Student loans
  • (Unsecured) car loans: Car loans can be included if they’re unsecured. However, secured car loans (where the car serves as collateral) may have different requirements.
  • Medical bills
  • Payday loans
  • Buy now, pay later (BNPL) debt
  • Other unsecured debts (like utility bills or personal lines of credit)

What debt can’t be consolidated?

Typically, you can’t consolidate mortgage debt as part of a debt consolidation loan. Mortgages are secured by your home, and they serve a different purpose. However, you can explore other options, such as refinancing your mortgage or using home equity for debt consolidation.

Related: How much does your credit score affect your mortgage rate?

Benefits of debt consolidation

There are many reasons why debt consolidation could benefit you. A consolidation loan comes with a fixed term and fixed monthly payments. That means that at the end of the term, the debt is fully paid off. At the same time, your previous liabilities - credit card balances, for example - are down to zero.

Since banks and credit unions may offer you a better rate on a loan than a high-interest credit card, you pay less out of pocket. Your debt, therefore, costs less in the long run.

Consistently making payments on your consolidation loan can improve your credit rating, as well.

Some potential downsides to debt consolidation

Not everyone will get approval for a consolidation loan. Most banks require some kind of security before they lend funds. This is why second mortgages and home refinancing may be discussed as alternatives for borrowers in this situation.

Even if you are approved, you may face another challenge: avoiding getting into debt again.

While some lenders will pay off and close your revolving credit accounts - those high-interest credit cards whose debt you have just consolidated - some may leave them open. As the cardholder, you may opt to keep certain credit cards open to help establish your history, for example.

However, debt consolidation is not the same thing as debt forgiveness, even if the load feels a little lighter. It is crucial that you stick with the loan repayment program and not incur any more revolving debt.

How to consolidate debt if your credit score is low

If you have a poor credit score, it may be harder to get approved for certain types of debt consolidation, or secure lower interest rates. For many of the methods listed above, you'll likely need a credit score of around 660 or higher. However, there’s still other courses of action you can take:

Choose a secured loan

With a secured loan, you provide collateral (such as a car or savings account) to guarantee the loan. Lenders may be more inclined to approve your application or offer a lower interest rate. However, if you fail to repay the loan, you risk losing the collateral.

Get a co-signer for your loan

Adding a co-signer can improve your approval prospects. You will need co-signer with either a better credit score or higher income than you. They share equal responsibility for the loan, even though they don’t directly access the funds. Just remember that if you miss payments, your co-signer will be on the hook and their credit score may be affected.

Consider joint loans

Like co-signed loans, joint loans involve a co-borrower. Both borrowers have equal access to the loan funds. The lender considers the credentials of both applicants when determining loan terms and rates.

Try an online lender

Online lenders provide convenient and faster funding. You can apply online and receive funds within a day. However, they charge higher interest rates for borrowers with bad credit, and impose origination fees to cover loan processing costs. These fees are deducted from the loan amount.

Go to a credit union

Credit unions are generally more lenient when it comes to credit scores and histories. They hold the loans they originate, which allows for greater flexibility. To apply for a credit union loan, you typically need to become a member. This may involve living or working nearby and paying a small membership fee.

Seek out a licensed insolvency trustee (LIT)

LITs are professionals authorized by the Office of the Superintendent of Bankruptcy Canada (OSB) to administer government-regulated insolvency proceedings. These proceedings include consumer proposals and bankruptcies. An LIT can help you create and file a consumer proposal.

This option allows you to negotiate with creditors to repay a portion of your debt over an extended period. It provides relief from overwhelming debt while avoiding bankruptcy.

Declare bankruptcy

If your financial situation is dire, bankruptcy might be an option to consider. An LIT guides you through the process, ensuring compliance with legal requirements. Bankruptcy allows you to be discharged from most of your debts, offering a fresh start.

You should seek out a professional to make informed decisions.

Read more: How long does a bad credit store stay on your record?

Crunch the numbers

Debt consolidation, when used the right way, can remove significant financial stress. You can start by using a debt consolidation calculator that can help you assess how much equity you can use from your home to pay off your other liabilities. Have a look and see what options you may have.

Arshi Hossain ,
Writer and Editor

Arshi Hossain is a writer and editor at RATESDOTCA. She has 4+ years of experience in delivering strategy-backed digital content through various mediums. Her expertise lies in breaking down complex information, meeting people where they are, and in the moments that matter.

Prior to joining RATESDOTCA, she worked in the editorial and digital content space at Wealthsimple, supported digital strategies, and UX writing for payment products and solutions at Bank of Montreal. She has also worked with startups to support editorial, content writing, communications, copywriting, and marketing needs.

  • Car Insurance
  • Home Insurance
  • Mortgage
  • Professional Communication - BA (Hons) at Toronto Metropolitan University with minors in Global Narratives, Public Relations, and Philosophy
Featured in
  • Financial publication, MoneyLetter
  • Golden Meteorite Press
  • Editorial spin-off series from the award-winning magazine, Money Diaries, for Wealthsimple Foundation.

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