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If you’re carrying a lot of debt, a debt consolidation loan can help you quickly get your financial life back on track.

Being in debt can cause you a huge amount of stress. It seems like every time you turn around, there’s another interest charge or late fee being added, until it simply feels like there’s no way you’re ever going to get out from under it.

If you’re in a situation like this, you’re not alone. The average Canadian non-mortgage debt rose to over $72,000 at the end of 2019, which includes credit cards, loans, and lines of credit.

Luckily, there are ways to take back control of your financial situation, one of which is a debt consolidation loan.

What is a debt consolidation loan?

A debt consolidation loan is a low(er) interest loan you use to pay off all of your other sources of higher interest debt.

So, instead of having a number of different debts – balances on a couple of credit cards, your car loan, your utility bills, etc. – you just have one debt, which is your debt consolidation loan.

Normally, you would talk to your bank about getting a debt consolidation loan.

If they’re unable or unwilling to help you, however, you should make an appointment with a local professional credit counsellor. Credit counsellors are there to help, and they’ll work with you to take stock of your situation, help you make a plan, and get you started back on the road to financial freedom.

Why should you consolidate your debt?

At first glance, a debt consolidation loan might not make a lot of sense. You’re just creating new debt to pay off old debt, while still ending up owing the same amount in the end. How does that help?

The magic is in the math. With lower interest rates and often longer repayment periods, debt consolidation loans simplify things and can save you a ton of money.

More manageable payments

First off, you’ll usually have a longer time to pay off your debt consolidation loan, so your total monthly payment will be lower and easier to manage.

Lower interest rates

Most credit cards have interest rates around 20% or higher, which can just keep snowballing indefinitely unless you can get on top of things.

Debt consolidation loans will normally have a significantly lower interest rate, so you’ll save a huge amount of money in interest payments over time.

Good for your credit

Missing payments on bills and credit cards will chip away at your credit score until there’s nothing left.

A debt consolidation loan, with its lower monthly payment, lower interest rates, and longer repayment period, makes it significantly easier to make payments on time. And the more you make your payments on time, the better your credit score will be.

Once you pay off the loan in full, your credit score will have improved significantly, and you’ll finally have some financial breathing room.

Reduces stress

Financial stress should not be underestimated. It can cause you to lose sleep, bring conflict into your family and relationships, and just be a mental burden.

Making a plan, getting a debt consolidation loan, and finally taking back control of your financial life will be a huge weight off your shoulders. It can take some work and discipline, but just imagine the relief you’ll feel when you have everything back under control.

Gets you back on track

Getting stuck in an endless spiral of high interest debt is debilitating. A debt consolidation loan gives you a clear way to break that cycle and get you, and your finances, back on track.

How does debt consolidation work?

Here’s an example of how debt consolidation works, demonstrating how it can simplify your life and save you a lot of money.

Let’s say you have 5 outstanding debts, which includes 2 credit cards, a car loan, financing for your personal laptop, and financing for a new TV.

Debt Repayment period Outstanding amount Interest rate Monthly payment Total paid
Credit card 1 5 years $5,000 22% $150.00 $7,568.03
Credit card 2 4 years $1,000 21% $30.00 $1,472.77
Car loan 5 years $12,000 15% $285.48 $17,128.80
Laptop financing 3 years $1,300 12% $43.18 $1,554.48
Store financing 2 years $1,700 19% $85.69 $2,056.56
Total $21,000 $594.35 $29,780.64

In this scenario, you have to put almost $600 a month on your debt payments in order to pay them all off in 5 years, and in that time you’ll be paying a staggering $8,780.64 in interest alone.

Now, let’s look at what happens with debt consolidation.

You go talk to your bank and they agree to give you a debt consolidation loan for $21,000 to pay off all of those debts.

Now you owe your bank $21,000, but they’ve given you a 9% interest rate. They also give you the option of paying it off over 3, 5, and 7 years.

Here’s what those look like.

3 year loan 5 year loan 7 year loan
Monthly payment $667.79 $435.93 $337.87
Total paid $24,040.44 $26,155.80 $28,381.08
Interest paid $3,040.44 $5,155.80 $7,381.08

If you bite the bullet, buckle down, and pay this off in 3 years, you’ll save over $5,700 in interest, although your monthly payment will be a little bit higher.

Pay it off in 5 years? You’re still saving over $3,600 in interest, and your monthly payment is much easier to handle.

If you pay it back over 7 years, you’ll be saving much less in terms of interest, but your monthly payment is almost cut in half. If you have limited income coming in, this may be the best way for you to manage that debt over the long term.

It seems pretty clear that getting a debt consolidation loan is the better move.

Not sure what a credit score is or what it means? We’ll walk you through it (it’s not that scary, we promise).

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What are some other ways you can consolidate your debt?

Getting a debt consolidation loan from your bank is probably the best option, but if your bank doesn’t want to work with you, there are some alternatives you might want to consider.

Line of credit

If you already have a line of credit, you could use that like a debt consolidation loan, taking money out of that to pay down your higher interest debts.


  • Flexible, because you can use it to pay off whichever debts you want, whenever you want. You can also pay it back as quickly or slowly as you like, although the slower you are, the more interest you’ll pay.


  • If you don’t already have a line of credit and the bank didn’t want to give you a loan, they’re probably not going to give you a line of credit, either. This is one of those financial tools that you should get before you need it.

Home equity loan or home equity line of credit

If you happen to be a homeowner with some equity in your house, a home equity loan or line of credit might be something to consider. These are forms of credit that are secured by the equity you have in your home.


  • Since these are forms of secured credit, lenders (usually your bank) are willing to give you a lower interest rate.
  • If you have a fair amount of equity in your home, you can borrow a fairly large amount of money against it.


  • The amount you can borrow depends entirely on how much equity you have in your home. If you’re still a relatively new homeowner and are early on in paying down your mortgage, the amount you can get will be very limited.
  • Whenever you use your home as collateral, you are reducing the amount of equity you have in your home. This is something to be avoided if possible. Never use a home equity loan or home equity line of credit for purchases that aren’t absolutely essential.

Credit card balance transfer

Not all credit cards are the same. Those fancy premium credit cards with all the travel perks and great rewards usually come with a high annual fee and some pretty high interest rates.

But there are other cards, simpler cards, cards specifically designed to help you reduce the amount of interest you’re paying on your credit card debt over time.

Often these cards will include welcome bonuses of low interest balance transfer rates for a certain period of time, such as 6 or 10 months.

If you can get one of these credit cards, you can transfer your higher-interest credit card debt to them, and save on interest charges while diligently paying the new credit card off.


  • If you can qualify for one of these low interest credit cards, a balance transfer can be a great way to lower your interest charges.


  • If you have bad credit, you may not qualify for one of these cards.
  • You can’t use the credit card for any other purchases if you have a low introductory balance transfer rate. Any additional charges you put on the card will be at the regular interest rate, and will be the last part of your debt to be paid off. You’ll wreck any progress you make if you do this.
  • The amount you can transfer will be limited by the credit limit you are given on the card. This may not be enough to fully consolidate your debts.

Low interest personal loan from a non-traditional lender

If your bank won’t work with you to get a loan or line of credit you can use to deal with your debt, there are other options out there, including getting a low interest personal loan from a non-traditional lender.

You can often find suitable loans from non-traditional lenders through third-party loan search services. These services will help you find lenders who are willing to give you a range of loans at a range of interest rates, which may be an option.

But you have to be very, very careful.

Seriously, we’re not kidding, you have to be careful

Please note the emphasis we put on “low interest” above.

There are personal loan companies out there that will be more than happy to loan you all sorts of money, even if you have poor credit, but there’s a good chance that they’ll charge you an exorbitant interest rate for the privilege.

We recently looked at a personal loan company who would happily give you a loan of up to $15,000 for as long as 60 months…for a breathtaking 46.93% interest.

If you use a personal loan calculator to do the math, you’ll see that if you took out the maximum loan for the maximum term at 46.93% interest, you’d end up with:

  • a $651.86 monthly payment,
  • a total repayment amount of $39,111.60, and
  • your total interest paid would be $24,111.60.

Obviously, these are staggeringly high numbers. These kinds of very high interest loans are going to put you in a bigger hole than you started in, and should be avoided at all costs.

Downsizing, cutting discretionary spending, and selling off assets

If your debt is in a relatively manageable range, you might best deal with it by downsizing, reducing your discretionary spending, and selling off some assets. You could do things like:

  • move into a smaller apartment to pay less rent,
  • reduce the number of streaming services you subscribe to,
  • eat out less often,
  • only shop the sales for groceries and other essentials,
  • get rid a vehicle if you have more than 1,
  • sell off that old comic book collection,
  • sell off sports equipment that you no longer use,
  • kijiji that old laptop, iPad, or cell phone,
  • and so on.

This can take some discipline and some work, but once you sit down and take a good long look at your spending, you may be surprised at just how much you can reduce your expenses just by paying closer attention.

And if you have stuff lying around that you don’t want or use any more that might be of value to someone else, why not try selling it? The internet makes this incredibly easy nowadays.

While this isn’t really an alternative to a debt consolidation loan, reducing spending, making (and sticking to) a budget, and using that extra money to pay down debt will at least get you going in the right direction.

It’s also just a good habit to get into.

Borrow from friends or family

We have this last in the list because it can be a very tricky thing to do. Few of us want to burden our friends and family with our troubles, and we never want to harm the relationships we have with those we love.

On the other hand, if you have good relationships with people who might be able to help you out, they might be more than happy to give you a hand.

Everyone’s situation is different of course, which is why we don’t really have a lot of specific advice around it, but this is one of the options that may be available to you.

Struggling with high interest credit card debt? Here are a few ways you can take back control.

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Bankruptcy or debt consolidation?

If you’re carrying a large amount of debt that you’re unsure you’ll ever be able to pay off, you may be considering declaring bankruptcy.

First, talk to a professional credit counsellor

Our first and best advice in this situation is to make an appointment with a professional credit counsellor, and go talk through your options with a professional before you make any final decisions.

There is a very good chance that they will have ideas and advice for you that you won’t find by searching on the internet. They are professionals who usually have years of experience and they’ve seen situations worse than yours. They are on your side, and really do want to help.

What happens when you declare bankruptcy

When you declare bankruptcy, you agree to surrender your assets in return for discharging your debts. And while you won’t necessarily lose all of your assets, you also won’t necessarily be released from all of your debts. There are exceptions on both sides.

Most of your unsecured debts will go away, including:

  • credit card balances,
  • unsecured lines of credit,
  • unsecured personal loans,
  • outstanding income and municipal taxes,
  • unpaid utility bills,
  • medical bills, and
  • payday loans.

Secured loans are treated differently, because there’s usually a creditor who has the right to the specific assets used to secure those loans.

There’s really a whole lot of detail involved with declaring bankruptcy, and it’s something that must be handled by a professional. If you do decide to take this route, you will need to work with a Licensed Insolvency Trustee (LIT) who will help you through the process.

A note about your bankruptcy will be added to your credit report and will stay there for a number of years (usually 6 or 7, but it depends where you live). This will obviously have a significant impact on your ability to secure credit in the future, but it won’t be impossible.

How debt consolidation helps you avoid bankruptcy

While it may feel impossible to deal with, consolidating your debt with the help of your bank or a credit counsellor will help you in a huge number of ways, including getting collection agencies and other debt collectors off your back.

Consumer proposal as an alternative

There’s a third way to deal with unmanageable debt, falling between debt consolidation loans and bankruptcy, called a “consumer proposal.”

A consumer proposal is a formal process that is also administered by a Licensed Insolvency Trustee (LIT). The LIT will work with you to develop an actual written proposal through which you offer to pay your creditors a percentage of what you owe to them, extend the time you have to pay, or both.

And creditors will often be willing to work with you on this because they know that if you’re working with an LIT, your next step is to declare bankruptcy, at which point they are likely to get even less out of the deal.

If the proposal is accepted, your LIT will act as an intermediary between you and your creditors. You will pay them either a lump sum or a certain monthly payment. Consumer proposals must be paid off in 5 years.

Like declaring bankruptcy, filing a consumer proposal will have a massive negative impact on your credit score, but will be cleared after a certain amount of time (usually 3 years after you’ve finished paying it off).

For more information about consumer proposals, there’s useful information, including how to find a Licensed Insolvency Trustee, over at the Government of Canada website.

Credit score required for a debt consolidation loan

The credit score you will need for a debt consolidation loan depends on a number of factors, including who’s offering the loan, whether you have any way to secure a loan, and what interest rates you’re likely to pay.

Your bank, for example, will likely require a higher credit score, but will also give you more flexible repayment options and a lower interest rate.

A non-traditional personal loan company may require a lower credit score, but you’re also going to end up with less favourable loan terms, and you may end up paying exceptionally high interest on the loan you get.

Will a debt consolidation loan impact my credit score?

Getting a debt consolidation loan and using it to pay off those high interest credit cards and other sources of debt typically has a beneficial effect on your credit score. And every time you make your loan payment on time, this will also reflect positively on your credit score.

On the other hand, part of the process of consolidating debt can involve closing older accounts, which can lower the average age of your credit accounts. This can have a short term negative impact on your credit score until the average age of your accounts increases again.

And, as we mentioned earlier, if you need to take more drastic measures, such as doing a consumer proposal or declaring bankruptcy, that will have a severe impact on your credit score, for quite a long time. If you can avoid taking such extreme measures, it’s for the best.

Debt consolidation can cause a bit of churn for your credit score, but it’s usually worth it. When you finally pay that loan off and regain your financial freedom, not only will you finally be able to breathe easy, your credit score should have bounced back and started to improve.

How to avoid repeating your mistakes

Once you’re out of debt, you should do everything you can to avoid making those mistakes again. But if you’ve made it this far, you probably already have a pretty good grasp on how to better manage your finances by:

Once you get into the habit of doing all of these things, you may soon find yourself with extra money on hand, at which point you can open a high interest savings account, an investment account, or contribute to your RRSP.

And just think about how fun it will be to see those numbers going up for once. It’s worth the time, discipline, and effort required to take back control of your financial life.

Having problems managing your spending? Maybe it’s time to dig in and finally make a budget.

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Bottom line

Being in debt can be incredibly stressful and can feel overwhelming and utterly hopeless at times. But if you step back, take a breath, and make a plan, all of these things can be sorted out.

A debt consolidation loan is often an excellent step towards regaining your financial freedom, and should be something to consider if you’re having problems managing your debt.

Have you ever been in serious debt?

How did you manage to dig yourself out of that hole?

Let us know in the comments.


Does debt consolidation affect your credit score?

Debt consolidation will normally only have a positive impact on your credit score by eliminating existing debts and giving you a more manageable monthly payment at a lower interest rate. So long as you consistently make your loan payments on time, your credit score will continue to rise.

What is debt consolidation?

Debt consolidation usually involves getting a debt consolidation loan and using that money to pay off all of your other debts. This simplifies your payment process a great deal, and usually gives you longer to pay the debt off (making for smaller monthly payments), at a lower interest rate.

How can I consolidate my debt?

The most common way to consolidate your debt is with a debt consolidation loan, but you can also use a line of credit, a low interest credit card balance transfer, a loan from friends or family, or a home equity loan or line of credit.

What happens if I declare bankruptcy?

Declaring bankruptcy is a complex process that requires the help of a Licensed Insolvency Trustee. There are a number of steps involved, and there’s no guarantee that you’ll be discharged of all your debts. Your LIT will walk you through the process if this is a route you decide to take. Declaring bankruptcy has a massive negative impact on your credit score.

What’s a consumer proposal?

A consumer proposal isn’t as drastic as declaring bankruptcy, but still requires the help of a Licensed Insolvency Trustee. They will help you put together a proposal for your creditors, and to act as an intermediary if that proposal is accepted. You can learn more about consumer proposals here.