Debt Consolidation:
All Your Questions

What Is Debt Consolidation and How Do I Consolidate My Debt?

Simply put, debt consolidation in Canada is the process of combining two or more debts into one monthly payment. People consolidate debt for any number of reasons; it can simplify their life and finances, ease stress, save them money by reducing interest rates, and enable them to pay off debt faster.

There are five main strategies for debt consolidation:

  • Credit card balance transfers
  • Debt consolidation loans
  • Debt consolidation programs
  • Home equity loans
  • Lines of credit

Depending on the method you choose, you will work with either a lender, a financial company, a creditor, or a credit counselling agency. Often, your ability to consolidate debt and the method you choose will be determined by your assets, income, type of debts you have, and your credit score. But fear not, there is debt consolidation for poor credit!

What Are My Debt Consolidation Options?

There are a number of debt consolidation solutions for combining your debts that may be available to you. The five most common debt consolidation solutions are:

  • Credit Card Balance Transfers.
    Balance transfers are often available, allowing you to combine the balances of multiple credit cards onto one card with a lower interest rate.
  • Debt Consolidation Loan.
    These can be obtained through a bank or a finance company, if you qualify, and can be used to pay off all your credit card debt and unsecured loans. Most people who have multiple credit cards with significant outstanding balances, seek debt consolidation loans to consolidate their credit card debt and pay it all off.
  • Debt Consolidation Program.
    This is an arrangement where a non-profit credit counselling agency works with your creditors to reduce or stop the interest on your debt, and roll all unsecured debts into one easily manageable payment. If you do not qualify for a debt consolidation loan, a debt consolidation program is your next option.
  • Home Equity Loan.
    Often called a “second mortgage,” this involves leveraging the equity in your home to obtain a loan, using your home as collateral. The loan amount is determined by the value of the home.
  • Line of Credit.
    Obtaining a line of credit involves borrowing from your bank. Lines of credit may be secured by your home, or may be unsecured if you have good credit and a high income.

There are advantages and disadvantages to each option, of course, which we’ll cover in Chapter 4.

Is Debt Consolidation a Good Idea?

Canada’s “borrowing binge” is taking its toll, causing both mental and physical anguish. In fact, recent studies have linked debt-related stress to depression, anxiety, high blood pressure, and even stroke.

So, if you’ve found yourself staring at a stack of bills with tears in your eyes and your head in your hands wondering, “How did I get into this mess?”

Or, if you keep your phone on vibrate to drown out the constant ringing from debt collectors…

Or, if your financial woes are causing you sleepless nights and disagreements with your spouse or partner…

Then debt consolidation may be just what you need to reclaim your financial freedom! There are a variety of ways to find debt consolidation help, and this is a great place to start!

What Happens in Debt Consolidation?

What happens in debt consolidation differs based on the debt consolidation method you choose. Here are the five methods we mentioned earlier, and the pros and cons of these debt consolidation strategies. Remember, you only want to consider low interest debt consolidation, otherwise you’re defeating the purpose.

  • Credit Card Balance Transfers.
    Balance transfer offers allow you to move the balances of other credit cards onto one card, which usually has a much lower interest rate, allowing you to pay off the debt more quickly. However, if you don’t pay the entire debt by the end of the promotional period (usually one year), the interest rate may double or triple, often to a level higher than what you were originally paying on the other credit cards.
  • Debt Consolidation Loan.
    Debt consolidation loans allow you to pay off all your secured and unsecured debts, and pay back just the one single loan. The interest rate on a debt consolidation loan is typically lower than what you were originally paying on each of the individual debts. However, to qualify for a debt consolidation loan you need to have collateral (such as a home) and/or a good credit score, which many in debt do not have. It’s virtually impossible to get a debt consolidation loan with bad credit.
  • Debt Consolidation Program.
    Debt consolidation programs are available even to people with bad credit. A debt consolidation program can reduce the interest rate on your unsecured debt, or stop it completely. They also allow you to make just one lower monthly payment that goes towards paying off all your unsecured debt. You do have to give up your credit cards while on the program, which some may view as a negative, but most people entering into a debt consolidation program have already maxed out their credit cards anyway, so it’s rarely an issue. A reputable agency will also teach you some money management basics, so you’re less likely to find yourself in debt trouble again in the future.
  • Home Equity Loan.
    A home equity loan gives you easy access to credit and they generally have lower interest rates than other debt consolidation methods. There is no prepayment penalty, and you only pay interest on the amount borrowed. However, because you are only required to pay the monthly interest amount, it can take a lot of discipline to pay it off, leaving many people carrying debt for a long period of time. In addition, lenders have the right to demand full payment at any time, and a default on your payments could lead to foreclosure.
  • Line of Credit.
    A line of credit often has a lower interest rate than a credit card,  and you can use it to pay unsecured and secured debt. If your line of credit comes from your personal bank, there may be no setup or annuals fees, and you can put overdraft protection in place from your chequing or savings account to avoid unnecessary fees. A major disadvantage is that people have been known to get into serious financial trouble due to its easy access; plus, if interest rates rise, you may have trouble paying it back.

An In-Depth Look at the Difference Between a Debt Consolidation PROGRAM and a Debt Consolidation LOAN.

Consolidation options causing confusion? That’s because too often some of the terms are used interchangeably. Let’s be clear: There are debt consolidation programs and debt consolidation loans, and they are not the same whatsoever.

Debt Consolidation Program

A Debt Consolidation Program is an arrangement that is made between your creditors and a credit counselling agency.  With a reputable, non-profit credit counselling agency on your side, a dedicated certified Credit Counsellor will act as your representative and personal expert, guiding you every step of the way throughout the entire process. They’ll take care of all the details, rounding up all your unsecured debt and negotiating with your creditors for you, so you can enjoy:

  • One monthly automatic payment paid via telephone banking, debit card, or money order, with full tracking. You send your payment to the credit counselling agency and they distribute it for you to your creditors for you.
  • A more affordable monthly payment. Many people have their debt paid off within 24 to 48 months.
  • Reduced interest on debt. This can add up to hundreds, if not thousands of dollars over time. Most creditors will even agree to a zero percent interest rate.
  • A set completion date. No more feelings of hopelessness, or wondering if you’ll ever have your debt paid off. This debt repayment plan comes with an end-date that you and your Counsellor agree on!

Your Counsellor will also help you build the financial future you want by teaching you how to:

  • Track your spending. Ever find yourself a week away from payday and wondering where all your money went? By keeping track of what you have coming in versus what you have going out, you’ll be able to easily see where you’re dropping the most coin—and where you can cut back.
  • Build a monthly budget that works for you. A budget isn’t meant to limit your spending; it funds your future. Better money management will help you grow your savings and build an emergency fund so you’re less likely to reach for your credit cards down the road.
  • Set financial goals. Where do you want to be in 5 years, besides out of debt? How about 15 years? Whether you want to be settled in a new home, helping your child through school, or looking forward to retirement, your Counsellor can help set realistic goals and show you how to achieve them, be it through investing or picking up a side hustle and joining Canada’s new gig economy!

Debt Consolidation Loan

A debt consolidation loan, on the other hand, involves taking out another loan to pay off your debts. If you’re wondering how to get a debt consolidation loan or credit card debt consolidation loan, you will need to go through a bank, credit union, or finance company. So rather than paying back numerous loans of varying sizes and at various interest rates to any number of creditors, you pay off all your debt using just the one large loan, and then focus on paying back the debt consolidation loan through the one lending institution at a set interest rate.