Debt Consolidation in Canada | Detailed Guide to Easy Ways to Manage What You Owe

October 12, 2021 | Editorial Team

What is Debt Consolidation How Does It Work in Canada?

Debt in Canada is increasing every year. More than a quarter of Canadians have in excess of $10,000 of consumer debt. This excludes debt such as mortgages, student loans and car loans. With credit cards and loans being so easily accessible, it is increasingly easy to get into debt.

The high-interest rates usually attached to these types of finance products can result in your debt growing even bigger.

If your debt becomes unmanageable, you may find you begin to make your payments late or miss your monthly payment altogether. Escaping this cycle can be challenging. In this situation, many people consider debt consolidation to be their best option for debt relief.

Debt consolidation involves bringing all of your existing debts together. This means you are combining or consolidating them into one more affordable monthly payment. You can use your debt consolidation loan to pay off high-interest debts such as credit cards, store cards, and other loans.

Debt consolidation loans are renowned for having lower lending rates than other forms of credit with longer repayment terms. Consolidation debt makes paying off your current debt a more manageable process.

The number of people who default on their loans and credit card payments has been increasing steadily for 30 years. Debt consolidation is, therefore, becoming an increasingly popular option for Canadians. Debt consolidation companies in Canada aim to help pay an individual pay off their debt. They provide debt relief when they consolidate debt by making their financial situation simpler and more practical.

Different Ways to Consolidate Debt

There are multiple debt consolidation options available in Canada. However, not all of the options may be available to you. This could be a result of your credit score being too low for you to qualify. It is important that you research each of the options thoroughly.

Below are some of the things you should pay attention to when researching your options.

  • The interest rate – You should look for the option with the lowest interest possible, as this will help you repay your debt faster.
  • How it will affect your credit rating – Some options will hurt your credit score, whereas others may improve your score.
  • The monthly payments – Ensure the payments are manageable and realistic for your budget.
  • Whether the loan is secured or unsecured – This will have an impact on how much you can borrow and what the interest will be.

In Canada, there are multiple options for reducing your debt through debt consolidation. We will look at some of the more popular options below. In addition, look at the debt consolidation options in various parts of Canada, namely in Edmonton, Toronto, Calgary, and also BC, Alberta and Ontario.

Home Equity Loan

If you are a homeowner, you may be able to use your home equity to help you get out of debt. Home equity is the difference between how much is remaining of your mortgage and the value of your home.

For example, if your home is worth $300,000 and you owe $120,000 on your mortgage, your home equity is $180,000. Your home equity can change as your home’s value increases or decreases, and as you continue to make payments on your mortgage.

Home equity loans will usually have a lower interest rate than other debt consolidation loans. However, keep in mind that you may lose your home if you are unable to keep up with your monthly payments. Below are the main options for using your home equity:

  1. Get a second mortgage that is secured against your home’s equity.
  2. Refinance your home and borrow up to 80% of the equity.
  3. Borrow the amount that you prepaid on the mortgage.
  4. Get a reverse mortgage – You can borrow up to 55% of your home’s value. You must be at least 55 years old.

Line of Credit

A Home Equity Line of Credit (HELOC) is another option for consolidating your debts. A HELOC is a secured form of credit, as your home is used to guarantee you will pay the money you have borrowed. A HELOC is what is know as revolving credit.

This means you can borrow money, pay it back and then borrow it again at another time. You can borrow up to 65% of the value of your home. This will be up to a maximum limit that will be pre-agreed between you and the lender.

The benefit of using a HELOC compared to a standard home equity loan is that once you have been approved for a line of credit, you can use these funds as and when you need them. You will need to repay back only the money you use and the interest attached to it. This means you are prepared for your current and future borrowing needs.

There are two main ways you can consolidate debt using lines of credit:

  1. HELOC combined with your mortgage.
  2. Stand-alone HELOC. Revolving credit that is unrelated to your mortgage but is guaranteed by your home.

Debt Consolidation Loan Through a Bank

Getting a debt consolidation through a bank is a popular choice. The bank will provide you with a lump sum of money you can use to repay your outstanding debt. You will then be responsible for making only one monthly payment to the bank.

Debt consolidation loans from the bank are most beneficial when you use them to pay for unsecured debts that have high interest. This includes, but is not limited to, credit card debt, payday loans and store cards. It is not usually beneficial to use a debt consolidation loan as payment for low-interest loans, mortgages or student loans.

There are several advantages to obtaining your loan from a bank:

  1. It can help to provide debt relief as it simplifies your finances and makes your repayments more manageable.
  2. They usually have lower interest rates than other loan providers.
  3. There are usually no additional fees or charges attached to the loan.

However, please take into account that banks can be very difficult to get debt consolidation loans from. They usually require you to have a good credit score. Additionally, they may require you to take a secured loan, which will require you to provide collateral.

Debt Consolidation Loan Through a Finance Company

If you are unable to get a debt consolidation loan through a bank, you may have to consider using other lenders. One of the alternative options available is to borrow money from a finance company. A finance company is a lender that provides loans to individuals or businesses.

They differ from banks as they do not provide other financial services such as checking accounts and mortgages. Finance companies make their profit from the interest you pay on your loan.

Finance companies are popular with those who cannot borrow money from other lenders because they have a low credit score. Some will require you to provide collateral (e.g. your home or car), which they can then seize if you default on the monthly payments.

Although loans from finance companies typically have higher interest rates, this will be lower if you choose to take a secured loan.

Another available type of lender is an online lender. Online lenders will usually allow anyone to borrow money, even if you have bad credit (see also ‘Best Second Chance Credit Cards‘). However, the interest on these loans can be much higher. Always check the interest rate and the payment plan before committing to one of these loans.

Credit Card Balance Transfer

If the majority of the debt you are struggling with is credit card debt, it could be worth considering a credit card balance transfer. Credit cards are notorious for having high-interest rates. This makes repaying the money you owe more difficult as you are often just paying the interest.

A balance transfer credit card will have very low-interest rates for a promotional period.

Paying back your credit card debt during this promotional period will be much more achievable. This is because the low interest will reduce your monthly payment. However, this may not be a good option for you if you cannot repay your credit card debt before the end of this time frame. This is because the interest you pay will then rise.

A credit card balance transfer will allow you to consolidate your other credit card debts into one monthly payment with low interest. This should make it much easier for you to get out of debt. Below are some of the most popular options for a credit card balance transfer.

  • CIBC Select Visa – 0% interest rate for 10 months. 1% transfer fee.
  • PC Financial Mastercard – 0.97% interest rate for 6 months.
  • Scotiabank Value Visa – 0.99% interest rate for 6 months. $29 annual fee.
  • Tangerine Money-Back Card – 1.95% interest rate for 6 months.

Debt Repayment Program

Debt Repayment Programs, or as they are also known, Debt Management Plans, are debt repayment plans that help you get out of debt. They involve working with a non-profit credit counselling agency. They will help you consolidate your debts by reducing your monthly payment and reducing your interest. They will help you to repay all of the money you owe in a manageable time frame.

The agency will arrange a voluntary agreement between you and your lenders. They will then charge you one payment every month and then use this to pay your debt companies. You will also be assigned your own credit counsellor who will help you to understand your finances and better control your money. This is, so you are less likely to accrue debt in the future.

A debt repayment program is usually used for people who do not qualify for a debt consolidation loan. Alternatively, it’s because the money they owe is so high that they need help to arrange a repayment plan.

A debt repayment program requires you to pay 100% of the money you owe. As well as providing debt relief, it will also have less of an impact on your credit score than debt repayment plans that reduce your debt amount.

How Interest Rates are Determined by Banks Finance

When you are looking for a debt consolidation loan, one of the main factors you may be interested in is the interest you will have to pay. Many people find themselves in the vicious cycle of debt because the interest on the debt they currently owe is too high.

A percentage of the payment you make each month will go towards the interest, rather than paying the actual debt. This makes it much harder to find the debt relief you are looking for.

Making the decision to consolidate debt means accepting that something in your current finances needs to change. Whether you are applying for a debt consolidation loan, credit card consolidation or another form of debt relief, you need to look at the interest rates.

In Canada, a bank’s interest rates are based on the guidelines set by the Bank of Canada. Some of the other influencing factors include the current demand for loans, interest rates in the United States of America and current inflation rates.

The Bank of Canada helps to manage the economy by setting the interest rates and by managing the amount of money being distributed.

The interest you are asked to pay may also be influenced by the length of time the money is loaned for. The longer your loan period, the higher the risk that you may default on the payments. A longer loan period may therefore mean you have to pay more interest.

If you are getting your debt consolidation loan from a lender other than a bank, the interest you will pay can vary between lenders. A financial lender makes a business decision when deciding the interest they will charge.

This means the same lender can offer different rates of interest depending on the individual who is applying. If your credit score is low and you currently have high debt, you are likely to be offered a loan with higher interest attached.

The Bottom Line

If you are looking to consolidate your debt, you have various options available to you. Make sure you do your research and choose a manageable option. The lender you choose should offer you a debt relief plan that works for you.

Ensure you consider the interest rate that is being offered to you and compare it to what you are currently paying. Additionally, make sure your monthly payments are affordable.

Once you have begun the process of consolidating your debt, you can help to improve your financial situation further. Check your credit score often, and calculate and manage your monthly budget.

Additionally, make sure you keep up with your payments on time. If you do all these things, hopefully, you will find yourself debt-free and with the financial stability, you have been craving.