Debt Consolidation: Is it the Right Option for You? And More Questions

If you’re battling too many debts, you’re not alone.

According to the Canada Revenue Agency research in 2019, 73.2% of Canadians have debts, and 31% are battling large debts.

While debt could be easy to access, paying it off could be difficult and costly.

If you’ve tried several ways to pay off your debt without success, it’s time to consider debt consolidation.

Consolidating all your debts into one loan could be a smart approach to regaining your financial freedom.

In this post, I provide everything you need to know about loan consolidation and how to go about it.

What is Debt Consolidation?

This is the process of combining multiple loans into a single new loan.

Consolidation can help you pay off your debts conveniently with lower interest rates.

As one of the effective debt management strategies, loan consolidation is ideal for people who have difficulty making regular payments on their debt.

Through consolidation, you can gradually eliminate all your debt using one loan.

As you continue reading, you will learn more about this debt payment method and whether to use it or not.

What Types of Debts Can I Consolidate?

The following are the types of debt you can consolidate:

1. Persona Loan

If you’re struggling to repay all your loans, you can consolidate them into one to reduce cost and interest rates.

2. Credit Card

You can also combine all your credit card debts into a single payment. This is a smart approach to overcoming the high interest rates of credit cards in Canada.

3. Utility Bills

Avoid late payment penalties of utility bills by combining all your payments into one. This will save you the cost of late payment and prevent hurting your credit score.

What Types of Debts I Can’t Consolidate?

The following are the types of debts that you can’t consolidate in Canada:

• Mortgages
• Car/RV loans
• Student loans
• Taxes owed to the government

Depending on your lender, you can get a loan consolidation for your secured and unsecured debt.

Secured loans usually have a lower interest, while unsecured loans have higher interest rates.

So ensure that you choose a lender that can consolidate your type of debt.

How Does Debt Consolidation Work in Canada?

As in other parts of the world, debt consolidation in Canada works by using a new loan to pay off your old debts.

Here’s a step-by-step explanation of how loan consolidation works in Canada:

• You apply for a loan that is equal to your existing debts.
• The lender will consider several factors to determine whether or not to approve your loan request.
• If approved, the loan will be used as one single payment to all your existing debts.
• Only the consolidation loan remains to be repaid, leaving you with a single monthly payment.

Some lenders will transfer the money into your chosen bank account to pay off the debts yourself.

However, the lender may choose to do a direct transfer. This implies that they will pay each of your creditors on your behalf.

All you need is to provide them with the account number and current balances of each of your creditors.

What are the Types of Debt Consolidation?

Here are the five common types of loan consolidation in Canada:

1. Low-Interest Credit Card

You can consolidate your existing debts using a low-interest credit card in Canada. All you need is to convert your high-interest credit card to a credit card with a low-interest rate.

2. Debt Consolidation Loan

Apply for a consolidation loan from a bank, credit union or any financial company to simplify your debt repayment.

3. Debt Consolidation Program

This is the process of engaging a credit counsellor to negotiate with your creditors toward reducing your interest rate and consolidating your debt. This could be cost-effective once you find a certified and skilled credit counsellor.

4. Line of Credit

You can also use a line of credit to consolidate your existing debts. Whether from your bank or a credit union, a line of credit is a cost-effective approach to consolidating your debt because of its low-interest rate.

5. HELOC

A Home Equity Line of Credit (HELOC) allows you to use your home equity to consolidate your existing debt. While this is the cheapest type of loan consolidation, it can be the most dangerous if you don’t commit to the rules.

What are the Benefits of Debt Consolidation Loans?

A debt consolidation loan is one of the common ways Canadians used to consolidate their debts. Here are some of the reasons behind this:

1. One Monthly Payment

With a consolidation loan, you can combine all your existing debt repayments into one monthly payment. This will save you time and the cost of meeting your due dates.

2. Lower Interest Rate

This type of loan helps lower the interest rates of your existing debts. However, this depends on how good your credit score is.

3. Reduce Monthly Payment

Due to the fact that future payments are extended when you consolidate, your total monthly payment is likely to drop.

However, even though this may be beneficial in terms of monthly budgeting, you may end up paying more even if the interest rate is lower.

4. Less Pressure from Creditors

Creditors and collectors may be disturbing you if you fail to meet your payment obligations. They want to get paid as soon as possible.

Consolidation combines all of your current loans, easing your financial burden, preventing disturbance from your creditors.

5.  Improve Credit Score

Due to a hard credit check, applying for a new loan may drop your credit score. A consolidation loan may help you boost your credit score in a variety of ways.

Paying off your credit cards may, for example, lower the credit usage rate shown on your credit report.

Furthermore, making on-time payments consistently can boost your credit score in the long run.

What are the Drawbacks of Debt Consolidation Loans?

Despite the benefits of consolidation, it is not the best option for everyone due to the following drawbacks:

1. Additional Costs

There may be additional expenses such as balance transfer fees and annual fees on your consolidation loan.

These additional charges may limit your ability to pay off your debts faster.

2. Risk of More Debt

Often, consolidating with a personal loan will not result in the cancellation of your credit cards. The accounts may remain open despite paying off the balances.

This implies that you have the opportunity to add to those cards’ balances. If you do this prior to paying off the debt, you will end up with more debt than less.

You must manage your budget to prevent additional credit card charges. This will help you avoid worsening your situation.

Thus, you should be able to pay off your balances to avoid incurring additional credit card debt while repaying your loan.

3. Increase Interest Rate

Consolidation could reduce your debt interest if you have a good credit score.

However, if your credit score is low to qualify for the best rates, you may be left with a rate that’s greater than what you’re paying on your existing loans.

This may include paying origination costs as well as additional interest throughout the loan’s term.

4. Limited Availability

Consolidation isn’t available for everyone. To qualify for an interest rate that makes this worthwhile, you usually need a good credit score.

In other words, you must have a credit score of 650 or above to get your consolidation application approved.

Also, a good credit score is your ticket to the lowest rate.

When Should I Consider a Debt Consolidation Loan?

As mentioned earlier, consolidation is not suitable for everyone. Even if you’re qualified for it, it may not be your best solution.

So consider consolidation if you have:

1. A Large Amount of Debt

Paying off a small amount of debt could take you less time and cost you less. However, paying off large debts could be time-consuming and costly. If you’re in this situation, it’s safe to consider consolidation.

2. Steady Cash Flow

To be on the safer side, you should only consider consolidation if you have a steady income stream to meet your single monthly payment.

Failure to meet your monthly payment could land you in big trouble in the long run.

3. A Good Credit Score

If you have a good credit score and are struggling with too many debts, it’s safe to consider consolidation.

A good credit score could help you get a lower interest rate on your existing debts, reducing costs in the long run.

4. Planning to Improve Your Finances

If you want to improve your finances while paying off your debt, consolidation could be the ideal option.

This will allow you to create an adequate budget that will help you pay off your debt without sacrificing your current standard of living.

What are the Requirements for a Debt Consolidation Loan?

To get a consolidation loan, you’ll have to convince your lender that you’ll be able to repay it. To determine this, your lender will need information about your:

1. Credit Score

Your lender will request your credit score to know how creditworthy you are. It is easy to qualify for a loan consolidation if you have a good credit score.

However, you will find it challenging to get consolidation approval with most lenders if you have a bad credit score.

3. Income

Your lender will request your pay stubs to know whether you can meet your monthly payment.

Furthermore, they may even request a letter from your employer to confirm your income.

4. Amount of Debt

To determine your eligibility, your lender will ask you about your current debt balances.

The lender will compare your income with your current balances to know whether you can meet your monthly payment.

How to Get a Debt Consolidation Loan Canada

Once you’re sure that you need a consolidation loan in Canada and meet the requirements, you can apply for your loan.

There are many ways of applying for a consolidation loan in Canada. The major ones are:

• Banks
• Credit unions
• Finance companies

Depending on the option you choose, each lender has different terms and conditions.

In Canada, banks are among the popular consolidation providers. But you have to be a member of a credit union to get a consolidation through it.

Online consolidation lenders are one of the easiest and fastest loan providers in Canada.

You can get your loan approved with online lenders within 24hours.

Whatever option you choose, ensure you’re okay with the terms and conditions.

Best Consolidation Loans in Canada

Here are the current best debt consolidation loans in Canada to consider: 

1. Consolidated Credit

This is a debt counselling service provider alongside a medium for debt consolidation loans in Canada. Consolidated Credit focuses on helping Canadians improve their credit scores through cost-effective debt counselling and credit-building loans. While the company doesn’t offer debt consolidation loans directly, it connects you with lenders that are ready to offer.Check it out

2. Alpine Credits

You can take more than a $10,000 debt consolidation loan on Alpine Credits using your home equity. Alpine Credits doesn’t bother about your credit score. So you can get approved regardless of your situation. With a low rate and up to 25 years repayment term, Alpine Credits could be your alternative debt consolidation loan provider in Canada.Check it out

3. LoanConnect

LoanConnect is one of Canada’s best loan search engines, offering access to high debt consolidation loan amounts with a long repayment term. This company partners with multiple lenders that don’t consider your credit score when evaluating your application.  You can access up to $50,000 on LoanConnect and repay in 60 months. Check it out

4. Borrowell

Borrowell is a popular and trusted credit score service provider offering access to debt consolidation loans in Canada. You can access a $12,500 loan on Borrowell and repay in 60 months, subject to your credit score. By partnering with multiple debt consolidation loan providers, you’re likely to find your perfect lender on Borrowell. Check it out

5. Loans Canada

Finally, you can also access consolidation loans through Loans Canada, a trusted loan search engine. Loans Canada partners with lenders that offer up to $300,000 debt consolidation loans with a 60-month maximum repayment period.With a 3% average interest rate and no credit score requirements, you’re likely to find the best deal on Loans Canada with fast approval. Check it out

Learn more about the best debt consolidation loans in Canada.

Is Consolidation the Right Option for You?

Debt consolidation is just one out of many ways you can follow to pay off your debt.

If you’re battling with too much credit card debt, these tricks may be what you need to become debt-free.

You need to exercise caution before applying for loan consolidation.

The loan should be used to assist you in paying off your debts, not to compound them.

If you take out a loan and then go on to accumulate additional debt, you’ve undermined the objective.

Examine the conditions of any loan application before signing it.

While you may be attracted by the single repayment method, it may cost you more in the long run than your existing debts.

Hence, the need to ask yourself: “Do I really need to consolidate my debt?”

It may not be easy to answer that question yourself. However, a knowledgeable and experienced financial advisor can help you with the perfect answer.

Debt Consolidation Canada Alternatives

The thing is, debt consolidation in Canada may not work for you even if you meet a lender’s requirements. Here are four alternatives to consider when looking for the perfect way to get out of debt fast:

1. Credit Card Balance Transfers

If you have credit card debt with high-interest rates, it may be wise to transfer them into a low-interest credit card. A balance transfer credit card allows you to convert high-interest credit cards to low or zero-interest credit cards.In most cases, your credit score and debt amount could determine your qualification for a low-credit card. The aim is to pay the full debt balance within the promotional rate period.  

2. Lines of Credit (LOCs)

A personal line of credit from your credit union or bank could also be your alternative to debt consolidation. Based on your credit score, you will get a line of credit that offers your revolving credit up to a certain limit. With a LOC, you only make monthly interest payments during the credit withdrawal period. While this can help you pay off your debt faster, it also subjects you to another debt.

3. Debt Management Plans

Enrolling in a debt management plan through a credit counselling agency could help you get out your debt fast. A debt management plan helps you fix a low consolidation repayment plan that suits your financial situation without taking additional debt.Your credit counselling agency will examine your situation to connect you with creditors that can work with your budget. Furthermore, the credit counselling agency will contact a creditor to negotiate an elimination or reduction on your balance interest.While your credit score is not required here, you must show proof of your ability to make monthly payments.  That said, one of the major drawbacks of debt management plans is that they appear on your credit report for two years, indicating your debt payment through a negotiated payment schedule. However, a debt management plan is more suitable for individuals that don’t qualify for debt consolidation loans. 

4. Home Equity Line of Credit (HELOC)

Home Equity Line of Credit should be your last alternative to debt consolidation loans in Canada. While your credit score doesn’t matter here, your home equity is at stake. A HELOC is a type of line of credit that’s based on your home equity. Regardless of your credit score, some creditors are ready to approve your loan based on your home equity. Taking a HELOC means taking a loan against your home equity. Home equity is calculated based on your current home value divided by the remaining mortgage balance.While you can qualify for a low-interest loan with HELOC, you can lose your home if you don’t keep up your payments.This makes a HELOC the best and the worst option for debt payment in Canada.

Final Thoughts

Collecting a loan is not bad. With the increase in the cost of living in Canada plus life surprises, most of us find debt inevitable at one point or the other in our lives.

However, not paying off your debt as at when due could ruin your financial freedom for everlasting.

But in case you’ve been trying several ways to pay off your debt in the past in vain, now you have a cost-effective strategy.

From the above discussion, you have learnt what debt consolidation is all about. But don’t rush to it.

Ensure that you really need a consolidation before applying for it. Else, you may end up compounding your debt and fall back to stage one.

Frequently Asked Questions

Is it Smart to Consolidate Debt?

It depends on your situation. If you have a large debt with a good credit score, it may be a smart option.

But if you have a small debt with a bad credit score, consolidation may not be the ideal option for you.

Do Consolidation Loans Hurt Your Credit Score?

Consolidation can hurt your credit score due to hard credit checks. Also, if you’re not committed to your repayment plan, it can hurt your credit score.

What Credit Score Do I Need for a Debt Consolidation Loan?

Most consolidation loan providers require a good credit score (650 and above) to approve your loan.

Can I Get a Debt Consolidation Loan with Bad Credit?

Yes, some consolidation loan providers can approve a loan with a bad credit score.

Why Was I Denied a Debt Consolidation Loan?

Probably you have a bad credit score and low income. Some consolidation loan providers may also deny you a loan because of high debt.

Have more questions? Let me know in the comment section.