Debt consolidation

What does this mean?

A debt consolidation loan is a single loan (generally from a financial institution) that allows you to repay your debts to several or all of your creditors at once. You are then left with only one outstanding loan — to the financial institution. In addition to streamlining your debts into a single payment, a debt consolidation loan may also offer you an interest rate that is lower than that charged by your creditors saving you money in interest charges. This option can be especially attractive if you have outstanding debts at a relatively high rate of interest (for example, those charged on some retail store cards or credit cards). You must ask your financial institution for a loan equal to the amount of your total outstanding debts that are currently due. In most cases, the financial institution will settle all the debts for you and, in return, the only monthly payment you will have to make will be to them.

Contact several financial institutions before you choose a consolidation loan since the interest rates offered by competing financial institutions may vary.

Eligible debts

This option may be suitable for debts such as those relating to credit cards, public utilities or other consumer loans. However, not all debts can be combined into a consolidation loan — a mortgage cannot be included, for example. Your financial institution will be able to tell you which of your debts you will be able to pay off with the loan that they grant you.

Who qualifies?

In order to qualify for a consolidation loan, a consumer usually needs to have an acceptable credit rating and sufficient income to demonstrate that they will be able to manage the loan (that is to say, to demonstrate they will be able to make the monthly consolidation payment, in addition to paying for their regular monthly bills and expenses).

Hand signWarning! A blemished credit rating will likely diminish your ability to secure a consolidation loan, therefore it is best to act as soon as possible (please refer to Credit and Credit Repair for more information).

How much does it cost?

It does not cost anything to apply for a loan in order to consolidate all your debts. However, a fee may be charged to open your file. Inquire at the financial institution that you choose.

Things to do and to remember…

  • Before meeting with a financial institution's loan officer, draw up a complete list of your current debts to determine the total amount of your outstanding debt. You don't have to include all your debts, but it is better to tell the loan officer about them. Since the officer has to look at your credit file in order to make a decision about a consolidation loan, they will have access to all this information anyway. It is best to be completely honest.
  • If the interest rate offered by your financial institution seems too high, don't hesitate to shop around at other financial institutions to try to negotiate a better rate. Some budget/credit counsellors suggest shopping at no more than 3 institutions because "an unusual increase in the number of inquiries can have a negative influence on your credit score".1 For more information on this topic, please refer to the Credit and Credit Repair section.
  • Be aware that many finance companies offer consolidation loans, but generally charge a higher interest rate compared to a mainstream financial institution. Before entering into any loan agreement, it is critically important to carefully review the terms and conditions (i.e., loan period, interest rate, special terms, fees, etc.) so that you know exactly how much the loan will end up costing you.
  • In most cases, once the loan has been granted, the financial institution will pay off the outstanding debts to your creditors. In some cases, based on your ability to convince the lending institution that you are back on track, you may be able to arrange to pay your creditors yourself directly.
  • Your financial institution may close credit accounts you have with stores, businesses or credit card issuers to make sure that you don't increase your debts while paying off the consolidation loan.
Advantages and disadvantages of consolidating your debts
Advantages Disadvantages
The interest rate charged by a financial institution for a personal loan is usually lower than the rate charged for a credit card. As a result, you will save on interest payments. Although this option may help you save on interest charges, you still have a combined debt, which represents the total of your old debts. If you are not careful, and you still have access to your accounts and credit cards, there is a chance that you will be tempted to use them, therefore go further into debt.
All your creditors will promptly be paid in full. You have the chance to maintain a good credit rating if you act quickly. Furthermore, you will only have to make a single monthly payment to your financial institution, instead of making several monthly payments to various creditors. Financial institutions may not be as flexible as your creditors. If you run into further problems, financial institutions will generally be less understanding and may refuse to accept a late payment. You must therefore make sure that this option is the best one for you.
As long as you follow the terms of your consolidation loan and make your payments on time, your credit rating should not be negatively affected.  

Where is this service available?

Inquire at financial institutions such as banks, Caisses populaires and credit unions in your area.

Next Page — Contacting Your Creditor(s)
Back — Ways to Reduce Your Debt


Back to Main Menu


1 Financial Consumer Agency of Canada, Understanding Your Credit Report and Credit Score, 2005. (Return to reference 1)