Breaking Free: How Debt Consolidation Can Help with Payday Loans

Payday loans can feel like a quick fix, but they often trap Canadians in a cycle of debt that’s difficult to escape. If you’ve taken out one or more payday loans and now find yourself drowning in high-interest payments with no end in sight, you’re not alone. Three percent of Canadian households took out a payday loan in 2023. 

We help thousands of Canadians facing the same uphill battle every year. At Credit Canada, a non-profit organization dedicated to helping Canadians achieve financial wellness, we understand the toll that payday loans can take. Our counsellors can provide tools, education, and one-on-one support to help you regain control and peace of mind.

This article explores how debt consolidation can offer relief from payday loans and outlines additional options if you’re not eligible for typical consolidation solutions. We’ll break down what consolidation means, how it works, and when it might be right for you.

What Are Payday Loans? (And Why They’re Problematic)

A payday loan is a short-term, high-interest loan intended to cover your expenses until your next paycheque. In Canada, these high-interest loans are typically capped at around $1,500 and must be repaid within 62 days.

Historically, payday loans have been infamous for unforgiving interest rates, including higher than 300%. In 2025, the Canadian government’s new regulations to lower the maximum interest rate lenders can legally charge took effect. 

This change is meant to protect you from high borrowing costs, especially with payday and installment loans. The new limit applies to most types of loans, making it illegal to charge interest above that rate. However, payday loans are still a very expensive option, and the new regulations don’t apply in Quebec and the territories.

This change in the law is a step in the right direction, but for many Canadians, payday loans are still a harsh financial reality. Regulations can only go so far. What matters are the day-to-day struggles people face when life takes an unexpected turn. Take Amy’s story, for example.

"Amy, a single mother of three, reached out to Credit Canada, feeling overwhelmed and regretful. Just before Christmas, she had taken out three payday loans to give her children a special holiday. They were still adjusting to the recent separation of their parents, and she wanted to bring them some joy.

However, shortly after returning to work in the new year, Amy was devastated to learn that her employer would be shutting down by the end of the month. Faced with job loss and mounting debt, she knew she was in a difficult situation.

Reaching out to Credit Canada, her Credit Counsellor was able to step in and help. As part of the solution, Amy had to change banks to protect her income and upcoming unemployment benefits. She also made adjustments to her spending habits to manage her repayments over the next 24 months.

She was incredibly grateful for the support she received, and she shared that the most impactful part of the experience was learning how to budget and save. Amy now plans to use savings to prepare for next Christmas, without relying on payday loans.”

—Mike Bergeron

Certified Credit Counsellor, Credit Canada

Payday Loan vs. Traditional Loan: A Quick Comparison

Before we get into the numbers, it’s important to understand a key concept: APR, or Annual Percentage Rate.

The interest rate is the basic cost of borrowing money, expressed as a percentage of the amount you borrow. But it doesn’t tell the full story. The APR includes not only the interest but also any fees and additional charges associated with the loan. It provides a more accurate picture of the true cost of borrowing, especially when comparing different types of credit products.

Let’s say you need to borrow $1,000 for just two weeks. Here's how much that could cost, depending on the borrowing option you choose:

Payday Loan

• Interest/Fees: $150–$200 (based on $15–$20 per $100 borrowed)
  • In provinces where there are payday loan regulations, the maximum cost of borrowing is $14 for each $100 you borrow.
• Total Repayment: $1,150–$1,200

Credit Card Cash Advance

• Interest/Fees: $25–$50 in interest, plus a typical $5 cash advance fee
• Total Repayment: $1,030–$1,055

Bank Overdraft

• Interest/Fees: $5–$10 in fees, plus daily interest
• Total Repayment: $1,010–$1,020

Line of Credit

• Interest/Fees: Around $4–$8 in interest
• Total Repayment: $1,004–$1,008

As you can see, payday loans are by far the most expensive option, even when borrowed for a short time. If you’re relying on them often, it might be time to explore more sustainable and affordable solutions, like debt consolidation or a DCP.

What Is Debt Consolidation?

Debt consolidation is the process of combining multiple debts—such as credit cards, payday loans, and other high-interest loans—into a single monthly payment, ideally at a lower interest rate.

There are several ways to consolidate debt in Canada:

• Personal loan: A lump-sum loan used to pay off existing debt.
• Line of credit: A flexible borrowing option with lower interest rates.
• Home Equity Line of Credit (HELOC): A loan secured against your home equity.
• Balance transfer credit card: Offers a low-interest rate for a limited time to pay off existing debts.

Each option comes with different eligibility criteria, and not all are accessible to payday loan borrowers, especially those with poor credit.  If you don’t qualify for a loan or line of credit, there are structured alternatives available through nonprofit credit counselling agencies.

Benefits of Debt Consolidation

One Manageable Monthly Payment 

Instead of juggling multiple due dates and lenders, debt consolidation simplifies your finances into one predictable monthly payment. This makes it easier to budget, reduces stress, and ensures you don’t miss payments, helping you stay on track.

Lower Interest Rates Than Payday Loans

Payday loans often come with sky-high interest rates. Debt consolidation replaces those with a much lower rate, saving you money and helping you pay off your debt faster.

Clear Repayment Timeline 

With payday loans, the repayment cycle can feel endless. Debt consolidation gives you a defined timeline, typically between one and five years, so you know exactly when you’ll be debt-free.

Potential Credit Score Improvement Over Time

Making consistent, on-time payments can gradually rebuild your credit score. Lenders view this as a sign of financial responsibility, which can open doors to better credit options in the future.

How Debt Consolidation Works: Step-by-Step

The goal is to combine your high-interest debts into one manageable monthly payment. Here’s how it typically works:

1. List all your unsecured debts: Start by gathering information about all your outstanding debts, including payday loans, credit cards, overdue bills, and other unsecured loans. Knowing the total amount you owe is essential to determining the best consolidation path.

2. Explore your consolidation options: Depending on your credit score and income, you may apply for a consolidation loan, line of credit, or balance transfer credit card. 

3. Pay off your existing debts: If approved for a loan or line of credit, you’ll use those funds to pay off your creditors directly. 

4. Make one consistent monthly payment: Now, you’ll make just one payment each month. This payment is then used to pay down your consolidated debt over time, helping you avoid missed deadlines and late fees.

5. Stick to your repayment plan: Staying committed to your repayment schedule is key. Over time, you’ll see your debt shrink, and you may even notice your credit score start to improve as you build a positive payment history.

Can You Consolidate Payday Loan Debt in Canada?

The short answer is: sometimes. Debt consolidation loans can be used to pay off payday loans, but approval depends on:

• Your credit score
• Your income
• Your total debt load (debt-to-income ratio)
• Your banking history and stability

Many traditional lenders hesitate to approve consolidation loans for borrowers with multiple payday loans, low income, or poor credit history. This makes payday loan relief complicated. If you’ve defaulted on payments in the past or have a low credit score, your chances may be limited.

"A payday loan might solve today’s problem, but it often creates tomorrow’s crisis."

- Mike Bergeron, Counsellor Manager, Credit Canada 

When It Works

• You have multiple high-interest debts
• Your income is steady
• You have good to excellent credit

Eligibility may vary depending on the exact type of product. 

When It Doesn’t

• You have no income or unstable employment
• Your credit score is very low (under 500)
• You’ve defaulted on past loans

Pros and Cons of Consolidation Loans

3 Alternatives If You’re Not Eligible for a Consolidation Loan

Not eligible for a consolidation loan? Don’t worry—there are other effective ways to break the payday loan cycle.

1. Debt Consolidation Program (DCP)

Offered by non-profit credit counselling agencies like Credit Canada, a Debt Consolidation Program (DCP, also referred to as a Debt Management Plan or DMP) consolidates your unsecured debts into one monthly payment. You don’t need a good credit score to qualify, and interest charges are often significantly reduced or eliminated.

• One monthly payment
• No loan needed
• Interest relief from creditors
• Support and guidance from a certified Credit Counsellor

Credit Canada’s DCP is a great solution for Canadians who don't qualify for traditional consolidation options. With our program, our certified Credit Counsellors can help you find the best solution so you can feel free from debt and regain control of your finances.

2. Consumer Proposal

Administered by a Licensed Insolvency Trustee (LIT), a consumer proposal is a legal agreement to settle your debt for less than what you owe.

• Reduces total debt owed
• Stops collection calls and wage garnishment
• Credit impact is less severe than bankruptcy

3. Bankruptcy (Last Resort)

If your debt is truly unmanageable, bankruptcy may be the only option. It eliminates most debts but comes with serious long-term credit consequences.

Comparison of Repayment Options

The Importance of Budget Planning

Breaking free from payday loan debt is only one piece of the puzzle—budget planning is essential to staying out of the payday loan cycle for good. A clear, realistic budget helps you understand where your money is going and where you can cut back to stay on track with your repayment goals. Reviewing your past spending and using a spending tracker can help you create a more informed budget.

At Credit Canada, our counsellors work with you to build a personalized monthly budget that prioritizes your needs, accounts for your debt payments, and even sets aside a bit for savings. You can also use our free Budget Planner Tool to get started. With the right plan in place, you can avoid relying on high-interest loans and start building long-term financial stability.

Get Your Finances Back on Track with Support From a Certified Credit Counsellor

So, can debt consolidation help with payday loans? Yes—but it’s not always a one-size-fits-all solution. While some Canadians qualify for consolidation loans, others may find more relief through a DCP or consumer proposal.

Credit Canada has helped thousands of Canadians just like you find relief and build a more stable financial future. We can help with our programming and financial advice, including loan repayment strategies, without taking on another loan.

Through a DCP, we negotiate with your creditors to reduce or eliminate interest, bundle your debts into one lower monthly payment, and provide you with the tools and support to stay on track. Our certified Credit Counsellors offer confidential, judgment-free support to help you build a path forward.

Ready to take the first step? Speak with one of our experts today, or receive AI-powered support 24/7 from Mariposa.