Debt Consolidation: All Your Questions Answered

Simply put, debt consolidation in Canada is the process of combining two or more debts into one monthly payment. People consolidate debt for any number of reasons; it can simplify their life and finances, ease stress, save them money by reducing interest rates, and enable them to pay off debt faster.

There are five main strategies for debt consolidation:

• Credit card balance transfers
• Debt consolidation loans 
• Debt consolidation programs
• Home equity loans
• Lines of credit

Depending on the method you choose, you will work with either a lender, a financial company, a creditor, or a credit counselling agency. Often, your ability to consolidate debt and the method you choose will be determined by your assets, income, type of debts you have, and your credit score. But fear not, there is debt consolidation for poor credit!

There are a number of debt consolidation solutions for combining your debts that may be available to you. The five most common debt consolidation solutions are:

• Credit Card Balance Transfers.
  Balance transfers are often available, allowing you to combine the balances of multiple credit cards onto one card with a lower interest rate.

• Debt Consolidation Loan.
  These can be obtained through a bank or a finance company, if you qualify, and can be used to pay off all your credit card debt and unsecured loans. Most people who have multiple credit cards with significant outstanding balances, seek debt consolidation loans to consolidate their credit card debt and pay it all off.

• Debt Consolidation Program.
  This is an arrangement where a non-profit credit counselling agency works with your creditors to reduce or stop the interest on your debt, and roll all unsecured debts into one easily manageable payment. If you do not qualify for a debt consolidation loan, a debt consolidation program is your next option.

• Home Equity Loan.
  Often called a “second mortgage,” this involves leveraging the equity in your home to obtain a loan, using your home as collateral. The loan amount is determined by the value of the home.

• Line of Credit.
  Obtaining a line of credit involves borrowing from your bank. Lines of credit may be secured by your home, or may be unsecured if you have good credit and a high income.

There are advantages and disadvantages to each option, of course, which we’ll cover in Chapter 4.

Canada’s “borrowing binge” is taking its toll, causing both mental and physical anguish. In fact, recent studies have linked debt-related stress to depression, anxiety, high blood pressure, and even stroke.

So, if you’ve found yourself staring at a stack of bills with tears in your eyes and your head in your hands wondering, “How did I get into this mess?”

Or, if you keep your phone on vibrate to drown out the constant ringing from debt collectors…

Or, if your financial woes are causing you sleepless nights and disagreements with your spouse or partner…

Then debt consolidation may be just what you need to reclaim your financial freedom! There are a variety of ways to find debt consolidation help, and this is a great place to start!

What happens in debt consolidation differs based on the debt consolidation method you choose. Here are the five methods we mentioned earlier, and the pros and cons of these debt consolidation strategies. Remember, you only want to consider low interest debt consolidation, otherwise you’re defeating the purpose.

• Credit Card Balance Transfers.
  Balance transfer offers allow you to move the balances of other credit cards onto one card, which usually has a much lower interest rate, allowing you to pay off the debt more quickly. However, if you don’t pay the entire debt by the end of the promotional period (usually one year), the interest rate may double or triple, often to a level higher than what you were originally paying on the other credit cards.
• Debt Consolidation Loan.
  Debt consolidation loans allow you to pay off all your secured and unsecured debts, and pay back just the one single loan. The interest rate on a debt consolidation loan is typically lower than what you were originally paying on each of the individual debts. However, to qualify for a debt consolidation loan you need to have collateral (such as a home) and/or a good credit score, which many in debt do not have. It’s virtually impossible to get a debt consolidation loan with bad credit. 
  
• Debt Consolidation Program.
  Debt consolidation programs are available even to people with bad credit. A debt consolidation program can reduce the interest rate on your unsecured debt, or stop it completely. They also allow you to make just one lower monthly payment that goes towards paying off all your unsecured debt. You do have to give up your credit cards while on the program, which some may view as a negative, but most people entering into a debt consolidation program have already maxed out their credit cards anyway, so it’s rarely an issue. A reputable agency will also teach you some money management basics, so you’re less likely to find yourself in debt trouble again in the future.
  
• Home Equity Loan.
  A home equity loan gives you easy access to credit and they generally have lower interest rates than other debt consolidation methods. There is no prepayment penalty, and you only pay interest on the amount borrowed. However, because you are only required to pay the monthly interest amount, it can take a lot of discipline to pay it off, leaving many people carrying debt for a long period of time. In addition, lenders have the right to demand full payment at any time, and a default on your payments could lead to foreclosure.
  
• Line of Credit.
  A line of credit often has a lower interest rate than a credit card,  and you can use it to pay unsecured and secured debt. If your line of credit comes from your personal bank, there may be no setup or annuals fees, and you can put overdraft protection in place from your chequing or savings account to avoid unnecessary fees. A major disadvantage is that people have been known to get into serious financial trouble due to its easy access; plus, if interest rates rise, you may have trouble paying it back.

Consolidation options causing confusion? That’s because too often some of the terms are used interchangeably. Let’s be clear: There are debt consolidation programs and debt consolidation loans, and they are not the same whatsoever.

Debt Consolidation Program

A Debt Consolidation Program is an arrangement that is made between your creditors and a credit counselling agency.  With a reputable, non-profit credit counselling agency on your side, a dedicated certified Credit Counsellor will act as your representative and personal expert, guiding you every step of the way throughout the entire process. They’ll take care of all the details, rounding up all your unsecured debt and negotiating with your creditors for you, so you can enjoy:

• One monthly automatic payment paid via telephone banking, debit card, or money order, with full tracking. You send your payment to the credit counselling agency and they distribute it for you to your creditors for you.
• A more affordable monthly payment. Many people have their debt paid off within 24 to 48 months.
• Reduced interest on debt. This can add up to hundreds, if not thousands of dollars over time. Most creditors will even agree to a zero percent interest rate.
• A set completion date. No more feelings of hopelessness, or wondering if you’ll ever have your debt paid off. This debt repayment plan comes with an end-date that you and your Counsellor agree on!

Your Counsellor will also help you build the financial future you want by teaching you how to:

• Track your spending. Ever find yourself a week away from payday and wondering where all your money went? By keeping track of what you have coming in versus what you have going out, you’ll be able to easily see where you’re dropping the most coin—and where you can cut back.
• Build a monthly budget that works for you. A budget isn't meant to limit your spending; it funds your future. Better money management will help you grow your savings and build an emergency fund so you’re less likely to reach for your credit cards down the road.
• Set financial goals. Where do you want to be in 5 years, besides out of debt? How about 15 years? Whether you want to be settled in a new home, helping your child through school, or looking forward to retirement, your Counsellor can help set realistic goals and show you how to achieve them, be it through investing or picking up a side hustle and joining Canada’s new gig economy!

Debt Consolidation Loan

A debt consolidation loan, on the other hand, involves taking out another loan to pay off your debts. If you’re wondering how to get a debt consolidation loan or credit card debt consolidation loan, you will need to go through a bank, credit union, or finance company. So rather than paying back numerous loans of varying sizes and at various interest rates to any number of creditors, you pay off all your debt using just the one large loan, and then focus on paying back the debt consolidation loan through the one lending institution at a set interest rate. 

A debt consolidation loan involves taking out another loan to pay off your debts.

But there's a catch: To obtain the best debt consolidation loans, your credit rating and score must be in good standing. That means you should be up to date on all your minimum payments and they should generally be made on time. But most people who seek a debt consolidation loan have reached a point where they've fallen behind on their payments and started getting collection calls, which is why so many people are rejected for debt consolidation loans (while also taking another hard hit to their credit). And if they are approved, interest rates can be higher than the original rates on each individual debt—possibly over 30 percent—which ultimately does more damage than good.

Rejected for a Consolidation Loan?

There’s another rub on the loan option: By taking out a loan to pay off your creditors, you still have continued access to the original accounts and credit cards, but now with zero balances. Sadly, many people wind up accruing more debt by continuing to use these accounts and credit cards, in addition to the new loan, thus defeating the purpose of debt consolidation and digging themselves even deeper into debt.

A Final Word of Caution: Beware of Debt Settlement Opportunities 

You know the saying, “If it sounds too good to be true, it probably is.” Despite offers that might sound legitimate, debt settlement companies have been the focus of consumer alerts from the Financial Consumer Agency of Canada. Some debt settlement agencies often claim to be part of a government program, when in fact no such program or government-supported initiative exists. Between upfront fees, high-pressure sales tactics, complicated contracts, and false claims, debt settlement companies should be approached with an extreme level of caution and skepticism.

There are many benefits to debt consolidation, but perhaps the biggest is the potential savings. While this chart is a hypothetical scenario, it demonstrates how a debt consolidation loan or debt consolidation program can reduce the amount you pay significantly. 

Let’s say you owe $15,000 on credit cards, with an average annual percentage rate of 20%, and you pay the minimum of $375 per month (or 2.5% of the balance). Here’s how this shakes out when compared to a debt consolidation loan and debt consolidation program.

	Paying Minimums on Credit Cards (20% APR)	Debt Consolidation Loan (8% APR)	Debt Consolidation Program (0% APR)
Monthly Payment	$375	$375	$347.19
Years to Payout	25+	3.9	4
Total Interest Paid	$27,563.14	$2,504.61	$0

As you can see, with a debt consolidation loan or debt consolidation program, you save money on interest—thousands, even tens of thousands of dollars— and you can have the bills paid off in much less time!

Want to see your potential savings? Be sure to try our free Debt Calculator in part 13.

While some people might think of bankruptcy as a “tabula rasa” or a blank slate, it's a common misconception. Bankruptcy can’t wipe away your woes, and acts more like a stubborn ghost that haunts you in a number of different ways:

• It kills your credit and makes it extremely difficult to rebuild.
• It takes your non-exempt assets, including RRSP contributions, HST cheques, and tax refunds.
• It seizes any equity you might have in your home; if you don’t have a home, obtaining a mortgage in the future will be next to impossible.
• Additional payments may be required based on your income.
• Administrative fees will be assessed.
• You must perform court-ordered duties, such as reporting your income, taxes, and attend mandatory counselling.

Bankruptcy can seriously limit your financial future, and hurt you in the short-term, too. It should only be considered as an absolute last resort when all other options have been explored and exhausted.

First, it’s important to understand there are two kinds of debt: secured and unsecured debt. Secured debt is tied to an asset, like a home or vehicle, while unsecured debt isn’t. Credit cards are an example of unsecured debt. What you can pay off with debt consolidation will depend on the debt consolidation method you choose.

Home equity loans or lines of credit are flexible, and you can generally pay off whatever you please. Debt consolidation loans are usually flexible as well, but their interest rate is likely going to be higher than the interest you are currently paying on your secured loans, like your mortgage and/or auto loan. In that case, it wouldn’t make much sense to pay off either with a debt consolidation loan, because you’ll pay more in interest.

Only unsecured loans can be paid off through a debt consolidation program. Again, there is no asset tied to an unsecured loan that can then be taken away in case you default on your payments. Unsecured loans include:

• Credit cards
• Unsecured lines of credit
• Utility bills
• Medical bills
• Payday loans

So while a Debt Consolidation Program will not include secured debts, it does make unsecured debts much more manageable, thus improving your ability to continue paying off your secured debts in a timely manner.

Unfortunately, crooked companies or unscrupulous people looking to exploit those in need are all-too-common these days. Sometimes, people can be so desperate for debt relief help that they’ll jump at the first opportunity that comes their way. That’s why it’s so critical that you do your own research before choosing the right agency to consolidate your debt. Here are 5 surefire ways to ensure the company you are working with for your Debt Consolidation Program is friend, not foe.

1. Ask about their fees.

Reputable debt and credit counselling agencies don’t come with a hefty price tag—that would kind of defeat the purpose, no? All counselling should be free, and if you do decide to start a Debt Consolidation Program you’ll likely pay just a small initial set-up fee. (Anything more than $50 should raise eyebrows.)

After that, a minimal management fee will be deducted from your monthly payment to cover processing costs and account management. This shouldn't be more than 10 percent.

2. Make sure they are a non-profit organization (NPO)

One easy way to ensure you’re not getting involved with a questionable agency or an outright scam is to check whether or not the agency is a non-profit organization—an NPO agency doesn’t stand to benefit by taking advantage of you; they aren’t trying to make money from you, so they simply have your best interests at heart.

One more thing to keep in mind: A true NPO will not be a lending agency, and therefore cannot offer you a debt consolidation loan because loans typically generate a profit for the lender, so it wouldn't make sense. Plus, a loan wouldn't be in your best interest anyway—you’re looking to consolidate debts, not acquire new debt.

3. Check to see if they have any accreditations.

Agencies holding accreditation from respected organizations must meet or exceed financial counselling industry standards, and counsellors must go through rigorous training. Two prominent organizations offering accreditation include:

• Credit Counselling Canada (CCC)
• Association for Financial Counselling & Planning Education (AFCPE)

4. Check their online reviews.

While the Better Business Bureau rates organizations based on complaints from the public, transparency (honesty about business practices), government licensing, advertising policies (again, are they honest?), and more, Google Reviews can quickly give you a real sense of what it's like to be one of their clients. Of course, you can't believe everything you read but if there are an overwhelming number of online complaints regarding the agency, your best bet is to run.

5. Look for consumer accolades or publication features

Sometimes, we just want to hear from our peers. Accolades like the Consumer Choice Award are awarded based on a strictly vetted selection process that includes nominations from consumers just like you. Also check if reputable publications feature the company as a legitimate source of information. This demonstrates a high level of trust as well!

Let’s face it, if you’re looking into a debt consolidation, chances are your credit has already taken more hits than Rocky Balboa. But like Rocky, you can come out a winner. How? Why, with a Debt Consolidation Program, of course!

A Debt Consolidation Program, when followed and completed successfully, will actually improve your credit in the long-run by properly addressing your debt. Plus, once you're completely debt-free your counsellor will put you on the fast track to rebuilding your credit.

Some of the blows delivered to your credit report are likely due to the following 3 factors. Here they are—and here’s how a Debt Consolidation Program can help.

One of the first questions people tend to ask when calling for financial advice is, “Do I have to give up my credit cards in debt consolidation?” It depends on the method of debt consolidation you choose. If you take out a home equity loan or line of credit, or choose a balance transfer, the answer is no. Most debt consolidation loans also allow you to keep your credit cards. But this often works against you, because now all your credit cards have zero balances. More often than not, people immediately start to use their credit cards again and find themselves back in credit card debt, but now with that large debt consolidation loan payment as well. So if you choose any of these debt consolidation options be sure to practice restraint!

In a debt consolidation program, you will need to cut the cards. But the truth is, most people in financial trouble don’t have any available credit to use anyway.

In a debt consolidation program, you will need to cut the cards. But the truth is, most people in financial trouble don’t have any available credit to use anyway. While creditors who accept the terms of the debt consolidation program will automatically close your account, you get the empowering pleasure of taking a pair of scissors to those skinny pieces of plastic that have caused so much grief and sleepless nights. 

Now like most people accustomed to credit, carrying cash or cheques is like going back to the Stone Age. But there are credit card loopholes, such as your debit card, as well as prepaid and secured credit cards. These cards are loaded with your own money and you can use them just like a regular credit card; however, the main difference being that when it’s out of money it’s essentially out of order. It won’t work again until you put more money on it, so there’s no longer any danger of dipping back into debt or incurring overdraft or late fees. And the bonus? Having a secured credit card can help you rebuild your credit.

If giving up your credit cards still scares you, remember: Going without credit isn't permanent, unless you choose to make it that way. Once you’ve successfully completed your debt consolidation program, your credit will begin to improve and you’ll be armed with better money management skills. And should you choose to use credit cards again, you can do so with confidence. Just be sure to remember to always play your cards right!

Looking to get your own debt consolidation plan? If you’ve got questions about how to consolidate debt in Canada, you’ll want to speak with a financial advisor or a certified Credit Counsellor.

At Credit Canada, we offer free financial assessments, advice, and tips when you call us at 1.800.267.2272. The call is confidential, and there is no judgment or pressure.

If you decide to sign up for a debt consolidation program after speaking with one of our certified Credit Counsellors, they can help you with that too. 

After completing a debt consolidation program, most people feel an overwhelming sense of relief and accomplishment.

After completing a debt consolidation program, most people feel an overwhelming sense of relief and accomplishment. We hear it all the time! Clients often say their newfound financial freedom has them thinking in the long-term, whether it’s finally owning a home, travelling someplace exotic, or putting money towards their children’s education. They also find themselves enjoying life more (rather than arguing with their partner), resting easier, and even breathing easier, too! But don’t take our word for it. Listen to what Bernice, Niki, Elaine, and Vito have to say about their debt consolidation experience.

Remember, maintaining a healthy financial outlook still takes a bit of work. Think about it—when you’re dieting and finally reach your goal weight, do you immediately go back to your old eating habits and start inhaling poutine and pizza? Probably not. Plus, you've likely built up new and improved eating habits. Well, the same goes for completing a debt consolidation program. Not only will you walk away debt-free, but you will also have developed valuable money management skills and techniques that you can apply directly to your life to help you move forward.

The proof is in the pudding. Seeing is believing. Less talk, more show. Whatever saying you prefer, we get it—you want to know exactly how much you could be saving and how fast you can be debt-free. Well, we’re here to help!

Just answer a couple of quick questions about your credit situation (you may need your credit card statements on-hand) and our Debt Calculator will give you your results instantly.

Still wondering “How can I consolidate my debt?” Don’t hesitate to call us—it’s completely free and confidential.