What You Should Know About Debt Consolidation Loans

We get a lot of calls about debt consolidation loans. Although we don’t offer loans, we can tell you all about them – plus how to get debt help if you’ve already applied and were rejected.

Rejected for a Consolidation Loan?

What Is a Debt Consolidation Loan and How Does It Work?

A debt consolidation loan is a debt repayment Bank Loanstrategy. Once someone has been approved for a debt consolidation loan by a bank, credit union, or finance company, it’s used to merge multiple debts, or “consolidate” them, into a single debt. The borrower is then left with one monthly loan payment with a set interest rate.

Most often, a debt consolidation loan can only be used to pay off unsecured, high-interest debts, such as credit cards and payday loans. While it’s possible to find a lender who will include a secured debt, such as a mortgage or auto loan, these generally have lower interest rates so it wouldn’t make sense to include them.

How Do I Know If a Debt Consolidation Loan Is Right for Me?

First, you should look at the interest rate you are currently paying on your high-interest, unsecured debts. You want to make sure that the debt consolidation loan has a lower interest rate than the average interest rate you are currently paying on your debts. 

Next, determine if the debt consolidation loan amount is large enough to pay off all of these debts at one time, otherwise you’re still going to have multiple sources of debt and stress. You also need to be disciplined enough to not use the credit cards that you paid off, otherwise you’ll find yourself back in debt in no time. 

Does a debt consolidation loan make sense for you? Our free Debt Calculator shows you different debt repayment strategies and exactly how much money you could save in interest!

Try Our Debt Consolidation Calculator!


Advantages and Disadvantages of Debt Consolidation Loans

Here's a look at the pros and cons of debt consolidation loans.


Through credit unions and major Canadian banks such as BMO, CIBC, RBC, TD, and Scotiabank, you can apply for a debt consolidation loan with the following benefits:

  • One Single Monthly Payment. This reduces the stress of remembering to pay multiple bills with multiple due dates. 
  • A Lower Interest Rate. This is generally true, but always do your own due diligence to be sure it’s less than the average interest rate on your debts.
  • You Can Pay Off Debt Faster. With a lower interest rate, you’re paying more on the principle, which also allows you to pay your debt off faster. 
  • There Are No Fees. There are generally no charges when taking out a loan.



Debt consolidation loans can be difficult to obtain, and without proper money management and budgeting skills, they may put you further into debt.

  • They Often Require Collateral. If you do not own property or assets, or cannot find a co-signer, you will probably be denied a consolidation loan from top-tier lenders.
  • You Need an Acceptable Credit Rating. Reputable businesses will not approve you without a credit check. If you have a low credit score, you will likely be denied or pay higher interest rates.
  • High-interest Rates May Apply. High-risk borrowers may pay interest rates of 14% to over 30% among second-tier lenders, which can do more harm than good.
  • They Can Lead You Further Into Debt. Many people continue using the accounts they’ve paid off, in addition to having to pay back the new debt consolidation loan, resulting in more debt.

It’s important to note that other debt consolidation options offer some of these benefits as well. We’ll cover these in the next section.

Rejected for a Consolidation Loan? 

There are other Canadian debt solutions!

There Are Other Debt Consolidation Options

Don’t like the idea of taking on more debt to pay off your current debt? Or have you been denied a debt consolidation loan? Here are four other debt consolidation options:

  • Credit Card Balance Transfers 

Combine the balances of multiple credit cards onto one card with a lower interest rate! There can be drawbacks, however, so be sure to check out our balance transfer blog.  

  • Home Equity Line of Credit (HELOC)

These “second mortgages” let you use the equity you have paid into your home to obtain a loan. Learn more in our HELOC blog.

  • Lines of Credit

Using collateral, you may be able to get a line of credit from your bank and use it for debt repayment. Learn more in Part 4 of Debt Consolidation: All Your Questions Answered.

  • Debt Consolidation Program

A program where you work with a non-profit credit counselling agency that negotiates with your creditors to consolidate your unsecured debt into one monthly payment with little or no interest. Learn more on our Debt Consolidation Program page.

Credit Canada Expert Tip:

Debt consolidation loans are in no way related to government debt management programs. Government debt consolidation loans do not exist. Avoid any debt service company claiming or suggesting they offer government-affiliated debt consolidation loans as this is likely a credit repair scam.

Before Making a Decision

Important things to think about when considering debt relief through a debt consolidation loan

Your Life Needs 

You need to be careful when considering a debt consolidation loan. The purpose of the loan should be to help you improve your debt problems, not make them worse. That purpose is defeated if after you get the loan, you go on to accrue more debt. 

Before you sign any loan application, carefully review the terms. While the repayment plan may seem appealing because it can free up more monthly cash for you, in the long-run it can end up costing you more than what your former, separate debts did.

Your Financial Goals

Where do you want to be in a year? Three years? Our free debt consolidation calculator can show you how long it will take you to pay off your debt using different payment methods (snowball vs avalanche) and how much you can save in interest.

Remember, a debt consolidation loan is just one option to help you manage your finances and address debt challenges, usually moderate in nature. But for those experiencing serious debt problems, a debt consolidation loan may not be the best course of action.

Debt Help is Available with a Debt Consolidation Program

Debt problems that are deeply rooted in poor spending habits or addictive behaviour may need special attention. For income earners, debt problems can be overcome with the help of skilled non-profit credit counselling professionals offering a Debt Consolidation Program.

There are many debt consolidation companies in Canada, but none with the experience and knowledge of Credit Canada. For over 50 years, we’ve been helping Canadians get debt help—and it shows in our Google Reviews, where our average score is 4.9 out of 5! 



Consider a Debt Consolidation Program

If you have been rejected for a debt consolidation loan and need debt relief, a Debt Consolidation Program might be the right fit for you. Simply fill out the form below and one of our debt experts will be in touch to discuss your personalized debt relief options. All of our counselling is 100% free, confidential, and non-judgmental.

Free Debt Assessment