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Debt Consolidation Loans

What are debt consolidation loans? How do they work? Are you eligible and is it the right choice for your personal situation?

What is a Debt Consolidation Loan?

A debt consolidation loan is a financial tool which allows you to combine or consolidate your unsecured debt – credit card debt, personal loans, and the like – into a single loan from a single lender. The lender pays off all of your unsecured debts while gathering the combined sum into a single loan with a set interest rate.

Creditworthy Only

Among first-tier lenders – including banks and credit unions – usually only the most creditworthy customers are eligible for consolidation loans. Through the main financial institution where they do business, some creditworthy customers can even merge unsecured debts they have outside of that institution as well.

For instance, if a favourable client has, say, three unsecured debts through their bank and two unsecured debts through another outside lender, the bank may approve the consolidation of all five debts into one loan.

Credit Check? Check.

Among first-tier lenders, as well as finance companies (second-tier lenders), a consolidation loan will not happen without a credit check on your rating as set by Canada’s two credit reporting agencies, Equifax and TransUnion.

Through these agencies, any lender can and will view your credit score (based on your full credit history) to determine how much risk you pose as a borrower. If you pose little to no risk, there is a stronger chance you will be eligible for a consolidation loan, and possibly for a lower interest rate.

Rejected for a Consolidation Loan?

High Interest Rates Apply

Debt consolidation loans can pose high interest rates.

Bad Credit

If you pose increased risk due to a bad credit score or even slightly tarnished credit – and if you are without property or assets to offer the lender as some security – you will probably be denied a consolidation loan from top-tier lenders.

For consolidation loans, low-risk borrowers receive the best interest rates, ranging from about 7% to 12%. Higher risk borrowers can expect to pay interest rates generally ranging from 14% to over 30% among second-tier lenders, which can do more harm than good.

Credit Canada Expert Tip:

Debt consolidation loans are in no way related to government programs. Government debt consolidation loans do not exist. Consolidation loans are made available to consumers mainly through banks, credit unions, and finance companies.

Avoid any debt services companies claiming or suggesting they offer government debt consolidation loans.

Before Making a Decision

Important things to consider when considering a debt consolidation loan.

Your Life Needs & Financial Goals

You need to be careful when considering to apply for a 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 onto accrue more debt through continued access to old accounts and credit cards, which probably led you to want to consolidate your debts in the first place.

The terms of any consolidation loan should be considered carefully. While the loan may seem appealing because its rate and schedule can free up more monthly cash for you, over a long repayment term, that loan can end up costing you more than what your former, separate debts cost you.


How Did You Get Here?

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 problems that are deeply rooted in poor spending habits, negative attitudes towards money, and/or addictive behaviour may need special attention.

For income earners, debt problems can be overcome with the help of skilled not-for-profit credit counselling professionals offering something called debt management or consolidation programs.

Consolidation "Loans" vs. Consolidation "Programs"

Debt consolidation programs are often confused with debt consolidation loans, but they are very different.

Debt Management Programs vs. Debt Consolidation Loans

So, What's the Difference?

A debt consolidation program resembles a debt consolidation loan in that the program combines all of your unsecured debt into a consolidated debt relief package. However, the program does not involve a loan. It is merely an “arrangement” where a qualified credit counselling expert works with lenders to help you pay off (usually in 3 to 5 years) all your personal debts through a single monthly payment you can afford.

Through this process, all interest charges will either stop completely or be dramatically reduced in order for the debt to be repaid quickly and easily. You will also benefit from additional counselling and budgeting programs that can help you better manage your finances.


More About Debt Consolidation Programs

Consider a Debt Consolidation Program

If you have been rejected for a debt consolidation loan, a debt consolidation program might be the right fit for you. Simply fill out the form below and one of our credit counsellors will reach out to you to begin discussing your personalized debt management options.

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