A debt consolidation loan is a debt repayment strategy. Once someone has been approved for a debt consolidation loan by a bank, credit union, or finance company, it’s used to merge multiple debts, or “consolidate” them, into a single debt. The borrower is then left with one monthly loan payment with a set interest rate.
Most often, a debt consolidation loan can only be used to pay off unsecured, high-interest debts, such as credit cards and payday loans. While it’s possible to find a lender who will include secured debt, such as a mortgage or auto loan, these types of debt tend to have comparatively low interest rates, so it wouldn’t make financial sense to include them in a Canadian debt consolidation loan.
First, you should look at the individual interest rates you are currently being charged on your high-interest, unsecured debts. You want to make sure the debt consolidation loan has a lower interest rate than the average interest rate you are currently paying on your debts.
Next, determine if the debt consolidation loan amount is large enough to pay off all of your unsecured, high-interest debts at the same time. Otherwise, you’re still going to have multiple sources of debt and stress. You also need to be disciplined enough to avoid using the credit cards that you paid off, or you may find yourself back in debt in no time.Then you’ll have to make monthly payments on your credit cards on top of paying back the debt consolidation loan.
Does a debt consolidation loan make sense for you? Our free Debt Calculator shows you different debt repayment strategies and exactly how much money you could save in interest!
Here’s a look at the pros and cons of consolidating your debt with a debt consolidation loan.
Credit unions and major Canadian banks, such as BMO, CIBC, RBC, TD, and Scotiabank all offer debt consolidation loans. If you apply for a debt consolidation loan and are approved, it can offer the following benefits:
Debt consolidation loans can be difficult to obtain, and without proper money management and budgeting skills, they may put you further into debt.
Were you rejected for a debt consolidation loan? It happens more often than you think. These are the three most common reasons why a debt consolidation loan is denied:
There are other Canadian debt solutions!
Don’t like the idea of taking on more debt to pay off your current debt? Or have you been denied a debt consolidation loan? Here are four other debt consolidation options:
Debt consolidation loans are in no way related to government debt management programs. Government debt consolidation loans do not exist. Avoid any debt service company claiming or suggesting they offer government-affiliated debt consolidation loans as this is likely a credit repair scam.
Important things to think about when considering debt relief through a debt consolidation loan include your life needs and your financial goals.
You need to be careful when considering a debt consolidation loan. The purpose of the loan should be to help you improve your debt problems, not make them worse. That purpose is defeated if, after you get the loan, you go on to accrue more debt.
Before you sign any loan application, carefully review the terms. While the repayment plan may seem appealing because it can free up more monthly cash for you, in the long run, it can end up costing you more than what your former, separate debts did.
Where do you want to be in a year? Three years? Our free debt consolidation calculator can show you how long it will take to pay off your debts using different payment methods (snowball vs avalanche) and how much you can save in interest.
Remember, a debt consolidation loan is just one option to help you manage your finances and address any debt challenges you might be facing, which are usually moderate in nature. But for those experiencing serious debt problems, a debt consolidation loan may not be the best course of action.
Debt consolidation loans are loans used to pay off debt. When you obtain one, multiple unsecured debts are combined into one single monthly payment on the new loan.
Debt consolidation loans generally offer lower interest rates than those offered on unsecured debts, allowing you to pay off debt faster. They also simplify your life by allowing you to make one monthly payment versus many with multiple due dates
Debt consolidation loans are used to pay off unsecured debts – “bad debts” which have high interest rates, such as credit card bills and payday loans.
Though rare, some lenders will include secured debts, such as a mortgage or auto loan, in a debt consolidation loan. However, secured debts generally have a lower interest rate than the debt consolidation loan itself, so it is not often recommended.
Debt consolidation loans are offered by banks, credit unions, and finance companies. To obtain a debt consolidation loan, you generally need to have good credit and a steady income.
The most common reasons why people are denied a debt consolidation loan are bad credit, low or no income, and high debt.
Reputable lenders want their clients to have good credit; this provides them reassurance that they will get their money back. If you have bad credit and you’re offered a debt loan, it could potentially be a loan scam. Loan scams often advertise “no credit check” or “guaranteed approval.”
A debt consolidation loan can help you pay off debt faster if it has a lower interest rate than your individual unsecured debts. However, many lenders often require collateral (such as your home) when offering a loan, and failure to pay the loan could jeopardize your home ownership. You could also find yourself deeper in debt if you continue to use the credit cards you’ve paid off, as you’ll now have the loan and the credit card bills to pay.
There are generally no fees for obtaining a debt consolidation when you work with a reputable lender.
A loan may initially lower your credit score, but with on-time payments, it will eventually rebound and improve your credit.
It is difficult to obtain a debt consolidation loan to pay off student loans, and it generally does not make financial sense as the interest rate on the student loan is usually lower than the interest rate on a debt consolidation loan.
In addition, student loans are considered “good debt” (as it is expected that higher education will also earn you a higher income) rather than bad debt (such as credit cards and payday loans) which offer no value.
Alternatives to debt loans include credit card balance transfers (combining the balances of multiple credit cards onto one card with a lower interest rate), a HELOC (borrowing money against the equity in your home), and a Debt Consolidation Program (working with a non-profit credit counselling agency that negotiates with your creditors on your behalf).
Simply fill out the form and one of our credit counselling experts will contact you. Soon, you’ll be on your way to a debt-free life!
