Debt Consolidation

Debt Consolidation Loan

In Canada consolidation loans are a way to combine several smaller loans into one single monthly payment. The concept is simple; getting the loan is the hard part. Here’s an example:

“You owe $15,000 on three different credits, and you owe $500 to a payday loan, and $1,500 to the government for taxes from last year. You get an $18,000 debt consolidation loan from your bank, and you use the money to pay off your credit cards, payday loan, and back taxes. Now instead of having five different debt payments each month, you only have one payment.”

Before deciding if debt consolidation is a good option to help you reduce your debts you need to determine if you qualify for a debt consolidation loan and are there enough benefits.

Do I qualify?

Consolidation loans in Canada are available at banks, credit unions and finance companies.  You can apply for an unsecured or secured consolidation loan (for example obtain a second mortgage to pay off credit card debt).  To qualify for a debt consolidation loan:

  • You need to have good credit.  If you are significantly behind on your payments you will likely be turned down or the interest charged may be so high that you should consider other debt relief options.
  • You may need to have security, that is an asset worth at least as much as the loan you are applying for.  Your bank may require security and consolidation loans such as a Home Equity Line of Credit or second mortgage usually provide lower interest rates than signature only loans (unsecured debt consolidation loans).
  • Not all debts can be included in a consolidation loan.  Secured debts such as your mortgage and car loan do not qualify.

Benefits of Debt Consolidation

  • Lower monthly payments:  If you can convert high interest credit card debt into a new loan with a lower overall interest rate you will be able to save on interest and lower your monthly payment.  Another option is to extend your repayment term to reduce your monthly payment however be aware this will keep you in debt longer.
  • Save on interest costs:  Consolidating high interest credit card debt into a bank loan or second mortgage which carries a lower interest rate can save you interest over the long term.  How much you save will depend upon how fast you pay off your new loan.
  • One easy monthly payment.  One of the biggest advantages of consolidating your debt is that you will now only have one simple monthly payment to make, rather than multiple payments.  This can make it easier to stay on top of your debt repayment.

Things to Consider About Debt Consolidation Before You Sign

Talk to a bankruptcy trustee to ask if debt consolidation is your best option. Get a FREE consultation.
A debt consolidation loan may seem like a great way to deal with your debts however not all consolidation loan companies are created equal and not everyone qualifies.  What should you do:

  • If the interest rate or up front fees charged by the consolidation loan company seem too high, don’t hesitate to shop around.  Don’t feel pressured into taking any offer.
  • Beware of debt consolidation loan scams.  If you are not being advanced new money to pay off your old debt that what you are signing up for is NOT a debt consolidation loan. ‘Debt consolidation programs’ are not the same as debt consolidation loans.  Make sure you understand what you are signing up for.
  • If you debts are so overwhelming that even combining them into one monthly payment will likely leave you in debt for years, you should consider you other debt relief options.  A consumer proposal is another great way to end up with only one single payment but can get you out of debt sooner and cost you less.