Debt Consolidation in Canada: How It Works and Where to Get a Loan

Debt consolidation means replacing several debts, such as credit card balances, store cards and other loans, with one new debt that pays them off. You are left with one payment instead of several, and if the new debt carries a lower rate than the old ones, more of each payment goes to the balance instead of interest. It doesn’t reduce what you owe: it changes the rate, the term and the number of payments. This page explains how consolidation works, when it saves money and when it doesn’t, the options available in Canada, where to get a debt consolidation loan at each credit level, and the risks. It is part of our personal loans and lines of credit guides; the wider set of ways to pay down debt is in our debt strategies guides.

How debt consolidation works

You take out one loan or credit product large enough to pay off the debts you are consolidating, use it to pay them off in full, and then repay the new debt on its own schedule. The saving comes from the gap between the old rates and the new one, and from paying the new debt off on a fixed schedule.

The same arithmetic shows how consolidation can cost more. Stretching the debt over a longer term than you would otherwise take lowers the payment but can add interest even at a lower rate, and a fee added to the loan eats into the saving. Our personal loan calculator shows the payment and total interest for any loan you are offered.

When consolidation saves money, and when it doesn’t

Consolidation doesn’t fix spending that created the debt. If the paid-off cards are used again, the result is more debt than before, not less.

Debt consolidation options in Canada

Lines of credit. A line of credit often carries a lower rate than a personal loan, but nothing forces the balance down: the minimum payment can be interest only. Line of credit rates compares what lenders charge for a personal line of credit, and the comparison of a personal loan vs a line of credit vs a credit card weighs the three; for card balances alone, see a line of credit vs a credit card.

Home equity. Homeowners can consolidate at the lowest rates through a home equity line of credit (HELOC) or a mortgage refinance, at the cost of securing the debt against their home. The revolving (non-amortizing) HELOC part can't exceed 65% of the home's value at a federally regulated lender. Our guide to debt consolidation using home equity covers both routes, and HELOC rates lists what lenders charge.

Balance transfer cards. A balance transfer card moves existing card balances to a promotional rate, usually for a fee, and the regular rate applies to whatever is left when the promotion ends. Offers change often; the balance transfer cards page lists current ones, and the balance transfer calculator shows whether a given offer saves money.

Debt management plans and consumer proposals. A debt management plan isn’t a loan: a non-profit credit counsellor negotiates with your creditors and collects one monthly payment; credit counselling explains how plans work and what they cost. A consumer proposal, filed through a Licensed Insolvency Trustee, settles unsecured debt for less than you owe; see the consumer proposal and bankruptcy guide.

Where to get a debt consolidation loan, by credit score

Rates on consolidation loans depend mostly on your credit. Typical ranges by credit tier:

Excellent credit (750 and up)

Good credit (680 to 749)

Fair credit (600 to 679)

Poor credit (below 600)

At the poor-credit end, a consolidation loan near the 35% cap can cost more than the credit card debt it replaces. Our guide to bad credit loans explains the criminal rate cap and the lenders in this range. For how lenders decide at each level, see personal loan lenders compared; many let you see an estimated rate after a soft credit check first, as explained in personal loan pre-approval.

How to consolidate debt, step by step

1. List every debt with its balance, interest rate and monthly payment, and work out the total and the average rate weighted by balance.
2. Check your credit report and score, which decide which options you qualify for.
3. Get quotes from your bank, a credit union and online lenders, and, if you own a home, a HELOC quote. Soft-check estimates don’t affect your score.
4. Compare the total cost, not just the payment: the new rate and term, any origination fee and any prepayment penalty, against the cost of repaying the current debts as they are.
5. Confirm the payment fits your budget with room left over.
6. Pay off the old debts as soon as the loan funds arrive, or let the lender pay them directly if it offers to.
7. Set up automatic payments on the new loan.
8. Decide what to do with the paid-off cards. Keeping an old card open helps your credit history; leaving it unused avoids building a new balance.

Lenders usually ask for proof of income, government-issued ID and details of the debts to be paid off.

How consolidation affects your credit score

In the first few months the effects pull in both directions. The application adds a hard inquiry and a new account, which can lower your score slightly; paying off card balances lowers your credit utilization, which usually raises it. Closing old cards can work against you by shortening your credit history and reducing available credit.

Over the following year or two, on-time payments on the loan and lower balances overall tend to improve a score. The biggest risk to your credit is the same as the biggest financial risk: running the cards up again, which brings back high utilization on top of the loan.

Red flags and risks

• A consolidation rate close to your current rates. After fees, the saving may disappear.
• A much longer term. A lower payment can hide a higher total cost.
• Securing unsecured debt against your home. A missed HELOC payment puts the house at risk where a missed card payment didn’t.
• Turning to payday lenders. A payday loan is not a consolidation tool; see payday loans and alternatives for what they cost.
• Companies asking for fees up front. A lender asking for money before releasing a loan is the pattern of a loan scam, and debt settlement firms that charge large up-front fees are covered in our guide to debt relief options.
• A co-signer to qualify. The co-signer becomes liable for the full debt; see co-signing a loan.

Alternatives to a consolidation loan

You don’t need a new loan to pay debt down faster. The avalanche and snowball methods order your existing debts so extra payments go furthest or build momentum, and the debt payoff calculator shows how long each takes. For credit card balances specifically, see how to get out of credit card debt. Creditors will sometimes lower a rate or agree a payment plan when asked; our guide to negotiating debt explains how. If the debts can’t be repaid in full, credit counselling and the consumer proposal and bankruptcy guide cover the formal options.