Looking for a debt consolidation loan in Canada to combine your debts into one single monthly payment? This post is for you.
A good debt consolidation strategy can lower your stress levels and get you back on the path to financial freedom by helping you:
- Save money on interest fees
- Pay off your debt faster
Below, I cover how debt consolidation loans work, bank and online lending solutions you can try, debt consolidation loan alternatives, and more.
What is a Debt Consolidation Loan?
A debt consolidation loan is a personal loan you can use to pay off your outstanding debt.
This is how it works:
- You apply for a debt consolidation loan from a bank, credit union, or online lender.
- Use the loan to pay off your existing high-interest debt such as credit cards, personal loans, payday loans, and other unsecured loans.
- Pay off the debt consolidation loan with fixed monthly repayments.
Best Debt Consolidation Loans in Canada
If you have a fair to very good credit score, a debt consolidation loan from a bank like CIBC, Scotiabank, BMO, TD, or your credit union, is a great place to start.
While banks may require collateral to approve your loan, their rates and fees are often lower.
If you have bad credit or can’t provide security (e.g a home), your loan application may not be approved by a bank.
In this case, an online debt consolidation loan from an alternative lender may be your best bet.
|LoanCanada||2.99% – 46.96%||$500 – $35,000||4-60 months|
|LoanConnect||5.75% – 46.96%||$500 – $500,000||6-60 months|
|Loanz||29.9% – 46.9%||$1,000 – $15,000||12-60 months|
Established in 2012, Loan Canada was Canada’s first loan comparison service.
The platform provides a portal for borrowers to compare and apply for a variety of loans for various purposes, including debt consolidation, car repair, bad credit, consumer proposal payoff, and guarantor loans.
To get started, visit their website to submit your application.
Loan Canada matches your application with a lender that suits your needs and offers you a quote.
If the rates and terms are acceptable, you can finalize your application, submit the necessary documentation, and receive funding.
- Interest rate: 2.99% – 46.96%
- Loan amount: $500 – $35,000
- Loan term: 4-6 months
LoanConnect is an online search engine for finding personal loan rates in Canada.
The company was established in 2016 and it connects lenders with top lending institutions including banks.
Loans available via the LoanConnect platform include debt consolidation, bad credit, personal, auto financing, and cash loans.
To get started, visit their website to submit an online application.
A pre-approval is usually available within minutes, and you can get the funds within 1-2 business days.
- Interest rate: 5.75% – 46.96%
- Loan amount: $500 – $50,000
- Loan term: 6-60 months
Loanz is a loans comparison platform based in Canada. It is owned by Consumer Genius Inc., a consumer acquisition company that also operates LendingArch and Cars Fast.
To get started, complete the online application form and Loanz will pair you up with a loans package that meets your needs.
You can receive funding within 1-2 business days.
- Interest rate: 29.9% to 46.9%
- Loan amount: $1,000 – $15,000
- Loan term: 12-60 months
How To Apply For a Debt Consolidation
Before applying for a debt consolidation loan, you should consider the following:
Credit score: If you don’t know what your credit score is, find out here. A good to excellent credit rating can help you obtain loans at competitive rates.
If your credit score is below 650, your chances of getting approved by a bank are slim.
Income: Lenders want to see that you are employed and have income sources that are sufficient to cover your monthly debt repayments. Your paystubs or a letter of employment are required during the application process.
Expect lenders to also look at your debt-to-income ratio.
Budgeting: Make a plan to pay off your debt consolidation loan as fast as possible by revamping your budget. If you are unable to make your scheduled payments, a debt consolidation loan will not solve your debt problem.
If debt consolidation looks like a good idea, visit your bank or one of the online loan lenders above to submit your application.
Before finalizing your loan application, ensure you understand the rate, fees, and terms of your contract.
Advantages of a Debt Consolidation Loan
After paying off all other debts, you are left with making one monthly payment which is less of a hassle.
Ideally, a debt consolidation loan should have a lower interest rate than the average interest rate you were paying. This results in lower interest costs over time and more money in your pocket.
When you pay off your debt consistently at a lower interest rate, you can pay it off faster.
Disadvantages of a Debt Consolidation Loan
Unless you have a decent credit score, you may find it challenging to get a debt consolidation loan at a competitive rate.
The snowball effect of a bad credit rating could mean that lenders want you to provide collateral. In the absence of acceptable security/collateral, your loan application may be denied or approved at higher interest rates.
Bad financial habits may still derail your debt repayment plan if you do not pay off your consolidation loan as planned.
Lastly, some debt consolidation loan lenders charge expensive origination fees.
Alternatives to Debt Consolidation Loans
You can also pay off debt and cut interest costs using the following strategies.
Balance Transfer Credit Cards
A balance transfer credit card moves your high-interest credit card debt from one card onto another credit card at a lower or 0% interest rate.
This lower rate is usually available for a specific period of time e.g. 6 months to 1 year.
When the balance transfer promotional period ends, the interest rate increases, but may still be lower than what you were previously paying.
Balance transfer credit cards in Canada include:
Note that balance transfer credit cards may charge a transfer fee of up to 3% of the amount being transferred.
Home Equity Loan
A home equity loan or line of credit makes it possible to borrow against the equity in your home.
You are effectively using your home as collateral to get a secured personal loan.
Debt Consolidation Program
You can work with a non-profit credit counselling organization to set up a debt management plan to pay off your debt.
This may include negotiating with your creditors to allow monthly repayments that fit your budget.
A credit counsellor can also advise you on other approaches to relieving your debt burden including filing a consumer proposal or declining bankruptcy.
Debt Consolidation FAQs
When you apply for a new loan, your credit score is impacted negatively in the short term. If you pay off your debt consolidation loan consistently, it can help you rebuild or increase your credit score.
You can use a debt consolidation loan, home equity loan, line of credit, or balance transfer credit card to consolidate your debts in one place.
Debt consolidation does not work if you are unable to make the new monthly payments for the loan.
If you don’t pay off your debt consolidation loan on time, you could damage your credit score and end up with larger debt and interest costs.