Debt consolidation is an option that many Canadians have considered at some point. This is partially because so many of us are in debt – either from mortgages, personal loans, credit cards, or a number of other reasons.
But it’s also partially because the options for debt consolidation are improving. Some might say they’re downright tempting.
With the crazy state of the Canadian housing market, rising interest rates, and many other factors, many people’s personal finances are becoming more stressful than they’d ever anticipated.
If you struggle with debt but haven’t yet looked into the idea yet, this might be the right time.
Debt consolidation facts: secured vs. unsecured debt
One of the first steps to paying off your debt is understanding its basics.
Two common words you’ll hear while learning about debt is “unsecured” and “secured,” but what do they mean? And what’s the difference between them?
Unsecured debt
Unsecured debt is the most common type and it’s also the kind you have if you owe something on your credit card – unless you have a secured credit card, of course.
There’s no collateral associated with this debt, and you didn’t have to make a downpayment or put something valuable on the line in case you don’t pay it off.
But that doesn’t mean you won’t be hounded to repay what you owe if you get behind on payments. Expect many calls, emails, and maybe even house visits if you find yourself unable to pay off your unsecured debt for an extended period of time.
Because credit companies have more to lose with this kind of debt, the interest rates tend to be a bit higher, so keep that in mind when choosing between the two types.
But hey, at least they can’t take your house.
Secured debt
Secured debt, on the other hand, has collateral associated with it which usually comes in the form of a down payment or putting your house on the line.
In exchange for giving the bank or lender more to fall back on, you get access to generally lower interest rates. But of course, the downside is you’re at risk for losing large sums of money, or worse, your home.
It’s best if you only consider getting into secured debt when you’re absolutely positive you can pay it off within the agreed-upon time frame. If your financial situation drastically shifts unexpectedly, you could be in for a really hard time.
Should you consider debt consolidation?
It’s easy to see why you’d want to consider debt consolidation. It’ll help lower your monthly payments and interest rates, as well as streamline the repayment process.
But it comes with some considerable risks, and you’re not really addressing the root of the problem – your overspending habits.
Taking out yet another loan to cover the loans you’re behind on could spell even worse trouble for you in the future. Piling on loan after loan isn’t going to get you any closer to being debt free…only repaying your loans can do that.
How debt consolidation works
So what is debt consolidation?
Well, you have several options for debt consolidation in Canada, but at the base of it all is a pretty simple premise:
- borrow money to cover your total debt to all lenders and banks,
- pay off everything with this money, and
- pay it off as normal, all in one place and (hopefully) at a lower interest rate.
Between the different options, the main thing that changes is how you get your centralized loan and what kind it is.
Your options for debt consolidation
If you’re still interested in debt consolidation, it’s important to not only know your options, but also the pros and cons associated with them.
| Loan type | Pros | Cons |
|---|---|---|
| Debt consolidation loan | Can often consolidate at a lower interest rate than credit card loans Allows you to make a plan to pay off your loan within a set amount of time | Typically higher interest rates than other consolidation options Are often secured Unsecured options have high interest rates Need a good credit score to qualify |
| Home equity loan | Typically have low interest rates | Your house is on the line Puts you further back in your mortgage payments |
| Lines of credit | Can have the lowest interest rates – typically floats with Prime Can be unsecured Have minimum monthly payments for when you have a tight month | Could fall into the trap of only paying interest, never denting your principal The Prime Rate could shoot up unexpectedly |
| Credit card | Good interest rates if you use low-interest credit cards Have minimum monthly payment options | Could fall into the trap of only paying interest If your interest rate is promotional, could rise substantially after promotion ends |
| Debt management program | Low interest rates, sometimes none at all Professionally assisted Creates a plan to have your debt paid off within a certain amount of time | Hurts your credit score for up to 2 years after you finish the program Hard to be accepted |
Use a debt consolidation loan
A debt consolidation loan is often offered by a bank, credit union, or other finance company. It’s the quintessential debt consolidation option, allowing you to bring together all of your loans into one payment.
This option will also allow you to set a date you’d like everything paid off by, usually 2 to 5 years in the future.
These loans are most often secured, which means you’ll have to put something on the line. Some options for collateral are:
- Your car (fairly new model)
- Your boat or other recreational vehicle
- Investments
- Your house
But because the bank has something to fall back on, you’ll get lower interest rates than if it were unsecured.
That being said, unsecured options do exist – but they’re much harder to be approved for.
Get a home equity loan
If you’ve heard someone say they had to “take out a second mortgage,” this option is what they were referring to. It’s a unique form of debt consolidation.
At a very basic level, home equity loans work by refinancing the part of your home that you’ve already paid off. For example, if your home is worth $200,000 and you’ve paid off $50,000 of it so far, you own that portion. You can essentially re-borrow use this part, called the equity, as a loan.
Of course, this is only an option if you have a part of your mortgage paid off already – often a significant amount. Another downside of taking out a home equity loan is the possibility of high-cost fees involved.
This also means you’re taking 2 steps back in terms of your mortgage payment.
Use a line of credit
Lines of credit work similarly to a credit card, where you can borrow money up to a pre-determined amount. You then pay back what you borrow in the form of monthly payments.
You have the option to only make minimum monthly payments, which are essentially paying off the interest. Don’t do this for too long though, since you’re not putting anything towards the principal (what you actually owe) – you could be in a loop forever if you never tackle the actual principal.
Lines of credit often base their interest rates on Canada’s Prime Rate plus a certain percent. For example, Prime + 2%. In this case, assuming the Prime was 3.95%, you’d be paying 5.95% interest.
Though relatively low right now, the danger of this variable interest rate is that the Prime could skyrocket virtually anytime. Though it’s not likely, this could make your payments unpayable within your budget if they rise high enough. This uncertainty is sometimes enough to turn many people off lines of credit.
Use a low interest credit card
Of course, you can also go with a traditional credit card as a debt consolidation option.
This isn’t recommended with the typical credit card since they average about 19% APR. But there are some great low interest credit cards out there that could get you a purchase rate as low as 8.99%.
Balance transfer for credit card debt consolidation
If the debt you want to pay off is from credit cards, another option is taking advantage of a balance transfer offer. You can often find low interest rates for a set amount of time – which can save you a lot of money if you’re able to pay off your debts within the time frame.
Just be diligent on paying back your debt before the promotion ends, or else you could be stuck with interest rates higher than you started with.
Best credit card options
If you think a balance transfer or low interest credit card is what you need, here are some of your top options.
As you can see, some cards offer the best of both worlds – a low interest rate AND a sweet balance transfer offer.
| Card | Best for | Details | |
|---|---|---|---|
| MBNA True Line Mastercard | Balance transfer AND low interest | * $100 GeniusCash * 12.99% purchase rate * 24.99% cash advance rate * 0% interest on balance transfers for 12 months (terms) (promo) | Learn more |
| MBNA True Line Gold Mastercard | Low interest | * 🐞% purchase rate * 🐞% cash advance rate * 🐞% balance transfer rate | Learn more |
| BMO Air Miles Mastercard | Balance transfer | * 0.99% promo interest rate for 9 months on balance transfers * 2% promo balance transfer fee * 1 Mile per $25 spent on all purchases * 3x the Miles for every $25 at participating Air Miles partners * 2x the Miles for every $25 spent at any eligible grocery stores | Learn more |
| BMO CashBack Mastercard | Balance transfer | *  $20 GeniusCash + 5% cash back for the first 3 months, plus $50 cash back (terms)* 0.99% promo interest rate for 9 on balance transfers * 2% promo balance transfer fee | Learn more |
| Scotiabank Value Visa | Balance transfer | * 0.99% promo interest rate for 6 months on balance transfers * 12.99% interest rate for purchases and cash advances | Learn more |
The MBNA True Line Mastercard has been named the best balance transfer card in Canada for good reason. Not only does it offer a sweet 0% interest on balance transfers for 12 months (terms), it also has a low regular rate of 12.99%. This card can really be a lifesaver.
Learn more about what this valuable credit card has to offer here:
You could get a 0% promotional annual interest rate (“AIR”)† for 12 months on balance transfers✪ completed within 90 days of account opening. Conditions and fees apply. And keep the savings going with low interest rates of 12.99% on purchases and 17.99% on balance transfers afterwards (24.99% on cash advances).
- Low permanent everyday interest rates
- A super sweet balance transfer promotion
- No annual fee
- Additional cards are free
- Cash advance interest rate is very high
- No rewards
- No insurance or perks
Join a debt management program
If you prefer some assistance with the process, a debt management program could be up your alley.
Partner up with a credit counselling organization (it’s best to stick to non-profit ones or else you might be facing a lot of fees) and they’ll act as a middle man to all your loans. You pay them, they pay your loans.
They can often negotiate lower interest rates with your bank, but this isn’t always accepted. The plan for these programs is usually to get everything paid off within 5 years.
Though your credit score will take a bit of a hit (especially if they’re able to settle some of your debt for you), this will mostly recover 2 years after completing the program.
Can those with bad credit still benefit from debt consolidation?
Chances are you’ll have a much harder time with debt consolidation if you’ve waited long enough for it to ruin your credit score. Unsecured debt, lines of credit, home equity loans, and many credit cards will most likely be out of your reach.
But you still have the option for secured loans and debt management programs. It’ll just be more of an uphill battle to be accepted.
Responsible debt consolidation can be a miracle
It’s important to remember that being in debt isn’t the end of the world – you have options for getting out.
But it’s equally important to consider the risks of each of these consolidation options. Is it right for you? Will you be able to pay off your new debts within the timeframe you set up? Are you ready to dedicate yourself to repaying them?
Taking out a loan to pay off another requires your full commitment. Don’t dig yourself a deeper hole than you started with.
Have you already taken steps to consolidate your debt? Which option did you choose and how is it working for you? We’d love to hear about your experiences, so feel free to leave us a comment in the section below.
FAQ
What does debt consolidation mean?
Debt consolidation is the process of combining several, separate forms of debt into one. This can be accomplished by borrowing a set amount of money to cover your total debt, and there are several methods that can help you do this. Of course, there are risks associated with debt consolidation, but for the right person in the right circumstances, it could be the helping hand you need to get out of debt.
What are the options for debt consolidation in Canada?
There are several ways Canadians can consolidate their debt. Debt consolidation loans, home equity loans, lines of credit, credit cards, and debt management programs are all methods that allow you to consolidate debts in various ways. You can read more about these methods here.
Is a debt consolidation loan a good idea?
For the right person in the right circumstances, a debt consolidation loan can be a huge help. They can provide you with the funds you need to pay off your debtors – however, most of these are secured loans, which means you’ll need to provide collateral. You can read more about these consolidation loans here.
What’s the best balance transfer credit card?
While there are several valuable balance transfer credit cards available in Canada, the best one is the MBNA True Line Mastercard. With this card, you’ll get a promotional 0% interest rate on balance transfers for 12 months. Click here to see more credit card options for balance transfers and low interest rates.
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