Find a debt consolidation loan with the best rates in Canada.

Choosing a debt consolidation loan is a good idea when you have multiple outstanding debts and would like to pay them back in one shot. Other circumstances that warrant a consolidation loan include:

• Owing $10,000 or less.
• Being in collections.
• If your current lender is unwilling to lower the rate on a high-interest loan.
• If you're having difficulty making payments on outstanding bills.

A lender first needs to evaluate how much risk you present before they approve you for a debt consolidation loan. 

Your credit report and credit score are two of the main tools that are used to determine whether or not you qualify for a debt consolidation loan.

In addition to your credit history, lenders will also examine your income, expenses, debts, assets and repayment history. When considering debt consolidation, it’s important to ensure that you are solvent — that means having the ability to pay your bills and debts when they are due.

All these variables will help lenders determine whether you’ll be able to pay off the loan.

There are several advantages to taking out a debt consolidation loan:

• When you consolidate your debt, the interest rates are averaged together, which usually reduces the overall interest rate.
• One monthly payment simplifies your budgeting process and potentially removes the stress of keeping track of multiple creditors as you only have one monthly payment to worry about.
• You can repay debts faster as you’re saving on interest costs and a higher portion of those savings can go towards your balance.

There are some risks that come with consolidating your debt with a loan.

• You may find yourself in even more debt: One risk of debt consolidation includes potentially acquiring more debt than before you took out the loan. Unfortunately, many people wind up in this situation because they continue to use their old credit cards, which plunges them right back into the debt cycle.
• Longer repayment term: If consumers aren’t careful, they could actually pay more in interest over the life of the loan. Some providers of debt consolidation loans make their money by stretching out the term of the loan beyond the term of the borrower’s previous debt. If the term of your debt consolidation loan is substantially longer than that of your previous debts, you will pay more in the long run.
• High interest rates: While low-risk borrowers receive more reasonable interest rates ranging from about 7% to 12%, higher-risk borrowers can expect to pay interest rates ranging from 14% to over 30% from second-tier lenders, which can do more harm than good.
• Debt consolidation may hurt your credit: Consolidating your debt with a loan might hurt your credit. Applying for a loan to consolidate debt requires a hard inquiry on your credit, which can lower your credit score by a number of points. However, if you work to change the habits that created your debt problem in the first place, your efforts eventually lead to an improved score.

Debt consolidation loans aren’t that different from a regular loan. The lender will provide a loan that’s large enough for you to repay your outstanding bills. 

Providers of debt consolidation loans may be able to provide assistance on how to amalgamate your debt and pay it off — for instance, if you have debt in collections and multiple different credit cards. They’re experts in this field.

If you have good credit:

Consumers with good credit can apply for a consolidation loan through first-tier lenders such as major Canadian banks and credit unions. Yes, it is possible to have good credit and need a consolidation loan. The good news is that you’ll have more options, will be able to take out a larger loan, and the loan will be easier to get.

If you have good or bad credit:

Online lending is a growing industry that caters to all credit scores. This is the type of lender that LowestRates.ca will connect you to.

When you start the application process with us, you’ll be able to compare various loan products on the amount, type, interest rate, term, and lender. Your loan offers are based on your credit score and also what you intend to use the loan for. If you’re looking to consolidate debt, we recommend shopping the market before applying for deciding on a lender.

If you’ve been turned down by other lenders:

You can also apply for a debt consolidation loan through a credit counselling agency. It’s part of their credit counselling program. They will pay off your debt for you and you pay the credit counselling agency back. Keep in mind, these are not charities. In Canada, there are for-profit and non-profit credit counselling agencies.

In this case, a non-profit credit counselling agency works with your creditors to reduce or stop the interest on your debt. This allows them to 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.

Another popular strategy used to tackle debt is a balance transfer credit card which is a form of debt consolidation.

With a balance transfer credit card, you can transfer debts from your existing credit cards to a single low-interest card. The advantages are some balance transfer credit cards have introductory interest rates as low as 0% for a promotional period and some allow you to transfer balances from anywhere between two to five other cards.

One drawback of the balance transfer route is that there’s almost always a fee attached; it may be a fixed amount, or it could be a percentage of the amount you’re transferring. With balance transfer cards, you’re paying a fee as well as interest. When borrowing to consolidate debt, there are no fees — only interest.

A balance transfer only works for credit card debt and the amount you transfer can’t exceed your credit card limit. A fixed-rate debt consolidation loan allows you to combine a wide variety of unsecured debts — that includes credit card debt, personal loans, phone and hydro bills.

If you can’t pay the balance in full during the credit card provider’s promotional period (the time period with the lowest charges) it’s not advisable to choose this option. The interest rate will increase significantly once the promotional period is over.

You can compare balance transfer credit cards on LowestRates.ca.

Some common reasons people are rejected for debt consolidation loans include:

• No collateral: In some cases, your lender may require you to back the loan with an asset worth at least as much as the loan you are applying for.
• Debt payment troubles: If you are significantly behind on your payments you will likely be turned down — or the interest charged might be so high that you should consider other relief options.
• Not enough income: If you aren’t making enough to make payments on the debt consolidation loan, it’s likely you’ll be rejected.
• Poor credit: You may also be rejected for a debt consolidation loan if you have poor credit – a common roadblock for individuals seeking consolidation loans.
• Not enough credit history: If you’re not a Canadian citizen or permanent resident, you may be turned down for a debt consolidation loan. You may also be turned down if you haven't built up enough credit history in Canada.
• Too much debt: Generally, banks and lenders will not allow individuals to borrow more than 40% of their yearly income. This means that your current debts, plus the consolidation loan cannot add up to more than 40% of your annual income. If they do, you may be rejected.

If you’re turned down for a consolidation loan don’t be discouraged, there are other options. Some of these include:

• Apply for a debt consolidation program: You may still be able to speak to a credit counsellor and apply for a debt consolidation program. In this case, 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’re rejected for a debt consolidation loan, a debt consolidation program is another option. Consumers interested in this method should note that for-profit credit counselling companies charge very large fees, but these can be safely avoided by working with a non-profit service.
• Find a cosigner: You may still be able to qualify if you can find a good co-signer who has a high net worth and a strong credit score.
• Consolidate your debt into your mortgage: You can also consider consolidating your debt into your mortgage. The bank can lend you money against the portion of your home that you own.
• Try a balance transfer credit card: If you've determined you can pay off your debt during the promotional period, you can give this option a shot.
• Manage your spending: No matter which option you choose, you should learn how to balance your saving with your spending. Some financial companies allow you to request “second chance credit,” which is a loan reserved for people for whom getting a loan of any other kind is impossible. Diligently making payments on this loan every month will rebuild your credit report and increase your chances of being able to obtain a traditional loan in the future. Second chance credit isn’t offered by banks. To get this type of credit, you’ll likely need to go through a car dealership or special financing company.

A debt consolidation program, sometimes called a debt repayment plan, can easily be confused with a debt consolidation loan. Instead, a debt consolidation program allows you to combine all your unsecured debt into a debt relief package.

This program does not involve a loan but instead involves a credit counsellor working with your debtors to help you pay off your personal debt within a reasonable amount of time. The arrangement will often require you to make one monthly, affordable payment, similar to a consolidation loan. This is mainly for unsecured debt.

Unlike a consolidation loan, a debt consolidation program will not wipe out your debt. Your debts will still show up on your credit report.

A debt consolidation loan wipes off your previous debts in your credit report because you’ve technically repaid them — although really what you’ve done is replace it with a new loan.