Debt counselling

Debt consolidation

What is debt consolidation?

Debt consolidation may be the right solution if you are looking to simplify your financial obligations. But it can mean many different things. Debt consolidation is a way to combine multiple debts into one new loan and one monthly payment. It can help you simplify your financial obligations, accelerate debt repayment and save you money on interest. But debt consolidation loans often require good credit and can sometimes put you deeper into debt.

You can divide debt consolidation into two types:

  1. Consolidating through a loan
  2. Consolidating through a debt relief program

Only the latter will ensure you actually reduce your debt.

Types of debts you can consolidate

Any debts that do not have collateral, like unsecured loans, are usually eligible for consolidation.

However, with secured loans, like your car loan or a mortgage, it is a much more complicated process to consolidate, which involves paying the loan in full first before the collateral can be released.

Different types of debt consolidation

1. Debt consolidation loan

Offered by financial institutions, a debt consolidation loan combines debts into a new loan with a single interest rate. Personal loans and unsecured lines of credit are popular examples. Debt consolidation loans simplify financial obligations and help you save money on interest, but they don’t necessarily help you eliminate debt.

Pros: A debt consolidation loan simplifies financial obligations and usually helps save on interest.

Cons: A debt consolidation loan does not reduce your debt load and if you continue to use your credit cards after consolidating your debt, it can lead to more debt.

2. Non-profit debt management program (DMP)

A credit counsellor can help you combine unsecured debts into one affordable monthly payment. You will likely pay less interest. But you will repay 100% of your debts over a period of up to 5 years. Your required monthly payments are made to your credit counsellor who distributes the funds to your creditors until your debts are paid off in full.

Pros: A DMP gives you a clear plan towards paying off your debt and helps you save on interest charges.

Cons: A DMP will have to pay all your debt back and excludes tax debt or payday loans. Creditors can also choose not to participate. And it could take a few years before your creditors accept the deal.

3. Debt settlement program

A debt settlement program is different than debt consolidation. It allows you to group all your debts together without taking out a new loan. Many debt settlement companies offer similar services to non-profit credit counselling services that help you combine your loans without issuing new credit. However, many debt settlement companies charge upfront fees and are not licensed to reduce your debt by renegotiating with your creditors, which only a Licensed Insolvency Trustee can do. In a debt settlement program, you’ll likely pay back all your debt and a little bit more.

Pros: A debt settlement program gives you a path towards paying off your debt.

Cons: The fees that you pay can vary from company to company and they aren’t legally binding on creditors. Creditors could still pursue debt repayment.

4. Consolidating with a consumer proposal

If you are unable to get approved for a debt consolidation loan, there are other options. A consumer proposal is one of two legal pathways to obtain debt relief. Less severe than bankruptcy, you can consolidate your unsecured debts into a single monthly payment and repay only a fraction of what you owe.

Pros: A consumer proposal can reduce the amount of debts you pay and accelerate debt repayment. It is legally binding on all creditors once accepted.

Cons: Your credit rating will be temporarily affected when you file a consumer proposal.

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How much does debt consolidation cost?

If you had $20,000 in unsecured debts (credit card, line of credit, payday loan debt), here is what your monthly payments and total loan charges would look like over approximately three years.

$20,000 of unsecured debt over a period of 3 years

Debt solutionMonthly paymentTotal cost
Debt repaid by individual$723.05$26,029.80
Consolidation loan$664.29$23,914.44
Debt settlement program$611.29$20,000
Consumer proposal$166.67$6,000

Compare the cost of different debt consolidation options based on your current debt levels by using our repayment options calculator.

When is a debt consolidation loan the right move?

Debt consolidation may be the right solution if your credit is strong, you have access to low interest rates, and you can make your monthly payments. Because debt consolidation loans only combine your debts, they don’t necessarily reduce them, they are only successful if they don’t end up adding to your debt.

What are the risks of a debt consolidation loan?

The danger with debt consolidation is that if your credit isn’t strong, you will be more likely to turn to an alternative lender, such as quick online loans or even payday loans, whose interest rates are extraordinarily high. Did you know that the estimated interest rate on a payday loan is slightly less than 600% each year?

Will a debt consolidation loan affect my credit score?

Yes, any new credit that you acquire will have an impact on your credit rating, but it will vary from person to person. In the short-term, it is likely that you will see your credit score dip. This happens when you submit new credit applications and when lenders perform credit inquiries. However, in the long-term, debt consolidation can help your credit score, provided you keep up with your monthly payments and use the loan to pay off debt.

When should you consider a consumer proposal to consolidate debt?

If you are finding it difficult to pay your monthly bills, you could benefit from a debt relief program that consolidates and reduces your debts. In a consumer proposal, a Licensed Insolvency Trustee can work with you and your creditors to renegotiate the amount you owe.

A consumer proposal will:

  • consolidate all your unsecured debts into one monthly payment;
  • renegotiate your debt load to a significantly lesser amount;
  • eliminate all interest charges;
  • provide debt relief without any impact to your assets or belongings.

There are many different options when it comes to debt consolidation loans. Before taking on new debt, talk with a Licensed Insolvency Trustee and learn about your best options.