Comparing Options for Debt Consolidation

Even if you can’t qualify for a low interest rate loan, you may be able to consolidate.

Debt Consolidation: Reduce Your Interest Rates and Lower Your Monthly Payments.

When most people think of debt consolidation, they think of personal loans. These are loans that you take out for the purpose of paying off other debts, and they can be highly effective in the right circumstances. However, there are other ways to roll multiple debts into a single monthly payment, which is what debt consolidation is. Understanding your options can help you make an informed decision about the best way to get out of debt in your unique financial situation.

This guide will help you understand what debt consolidation is, how various types of consolidation work and how to find the best option for you. If you have any questions, call us at 1-888-294-3130 to speak with a trained credit counsellor.

What is debt consolidation?

Debt consolidation simply refers to the process of combining multiple debts into one monthly payment. The goal is to simplify your repayment schedule, so you only have one bill to worry about each month.

In addition, you generally want to reduce or eliminate the APR applied to the debt. This allows you to focus on paying off the principal (the actual debt you owe), instead of devoting money to covering accrued monthly interest charges. Minimizing APR makes it easier to pay off debt faster and reduces your total costs.

The most popular way to consolidate debt is with a personal debt consolidation loan. This is an unsecured loan that you take out to pay off credit cards and other debt. However, it’s not the only way to consolidate. Balance transfer credit cards and debt management plans through a credit counselling.

This table shows when each option is best used and what restrictions and challenges you may face. Below, you can find an explanation of how each method for consolidation works.

Balance TransferDebt Consolidation LoanDebt Management Plan
Recommended debt amount$2,000-$3,000 maximum$25,000-$30,000 maximum$10,000-$100,000+
Recommended credit scoreGood-Excellent (650+)Good-Excellent (650+)No score requirement
APR impactReduces APR, may eliminate APR temporarilyReduced, fixed-rateEliminates or reduces APR
Monthly paymentsMay be higher to eliminate the consolidated balance in fullMay lower your total monthly payments, depending on the loan termReduces total credit card payments by up to 30-50%, may reduce monthly payment amount as well
Term (time to pay off balance in full)6-18 months, depending on card12-48 months, depending on lender36-60 months
Credit score effectWon’t damage your credit scoreWon’t damage your credit scoreNoted on your credit report for 2 years from the date you complete the plan

As you can see, if you have good or excellent credit and a limited debt amount, you should be able to consolidate successfully on your own. This will help you avoid damaging your credit as you get out of debt, as long as you keep up with the payments.

However, if you have bad credit or a large volume of debt, then you may need help to consolidate. You still pay back everything you owe, which helps you avoid more severe credit damage caused by other solutions, such as bankruptcy or debt settlement. However, it will be noted in your credit report, which can decrease your score for a short period of time.

How debt consolidation works

Each option for consolidation works in a different way, even though the result of getting one monthly payment is the same in each case.

Option 1: Credit card balance transfer

This option is wholly focused on consolidating existing credit card balances. You get a new balance transfer account and move your existing balances to the new card.

How balance transfers work

  1. First, you shop around for a balance transfer card that fits your needs. You want to look for:
    1. Low balance transfer fees
    2. Low APR on balance transfers
    3. A long 0% APR introductory period, which gives you time to pay off the debt interest-free.
  2. Once you find the card that fits your needs, you apply for it and get approved based on your credit score.
    1. A better score generally means a longer 0% APR period, which is ideal
  3. Once the account is open, you transfer your existing credit card balances to the new card.
  4. You generally must pay a balance transfer fee on each balance you move
    1. These generally range from 3-5% of the balance transferred
  5. Then you pay off the consolidated balance with the largest payments possible
    1. Your goal is generally to eliminate the balance in full before the 0% APR period ends.

Learn more about balance transfers »

Option 2: Debt consolidation loans

This is by far the most well-known and popular way to consolidate debt. You take out an unsecured personal loan and use the funds to pay off your credit cards and other debts. This leaves only the loan to repay.

How consolidation loans work

  1. Shop around to find an unsecured personal loan for the purpose of debt consolidation. Look for:
    1. Low loan origination fees (the cost to take out the loan)
    2. Low APR
    3. A term (loan length) that offers monthly payments you can afford.
  2. Once you find a loan you like, apply for it and get approved based on your credit score.
  3. Use the funds from the loan to pay off your existing debts. This can include:
    1. Credit cards
    2. Gas cards
    3. Store cards
    4. Lines of credit (LOCs)
    5. Balances from other personal loans
    6. Child and spousal support arrears
    7. Back taxes owed to the CRA
  4. Pay off the balance in installments.
    1. If you choose a shorter term, it will increase the monthly payment amount but lower the total cost.
    2. If you choose a longer term, it will decrease the monthly payment amount but increase the total cost.

See if you’re a good candidate for a consolidation loan »

Option 3: Debt management program

The final option that consolidates your debt into a single monthly payment requires professional help. Unlike the first two options, you don’t take out new financing to pay your existing debts.

Instead, a credit counselling agency helps you set up a repayment plan that pays off all your credit cards at reduced or eliminated interest rates. You still owe your original creditors, but the agency acts as your advocate to help you simplify your repayment schedule and get out of debt faster.

How debt management plans work

  1. You request a free debt and budget evaluation from a trained credit counsellor.
  2. The counsellor evaluates your debt, credit card budget to see which solutions will work best in your financial situation.
  3. If you can’t consolidate on your own and you’re a good candidate for a debt management plan, the counsellor can help you enroll.
    1. As long as you have the means to make a reduced monthly payment, you will typically qualify.
  4. Then the counselling agency contacts your creditors to arrange payments through their agency. Your creditors agree to:
    1. Accept reduced monthly payments through the program
    2. Eliminate or reduce the APR applied to your balance
    3. Stop future penalties and late fees
  5. Once all your creditors agree, your plan starts.
    1. You make one monthly payment to the agency and they distribute the payment to your creditors on your behalf.
  6. While you are enrolled, your credit cards will be frozen and you won’t be able to apply for new cards until you graduate.
  7. The DMP will be noted in your credit report for two years from the date you complete the program.

Here are a few examples of how this type of plan helped other Canadians become debt-free:

Additional resources to help you decide if consolidation is right for you

Weigh the pros and cons of consolidating debt

The biggest benefit of debt consolidation is that it gives you the ability to pay back everything you owe in a more efficient way. You enjoy one monthly payment instead of having to juggle multiple bills. In addition, by minimizing interest charges, you can get out of debt faster, even though in some cases you may pay less each month.

The downsides of consolidation really depend on which option you use to consolidate. The do-it-yourself options don’t work for everyone, while the professionally-support option can damage your credit.

Weigh the pros and cons of each option for consolidation »

Choosing the right option for consolidation

Finding the best way to consolidate for your unique financial situation is essential. The wrong choice could keep you in debt longer, lead to higher costs, or damage your credit score. You should never go into any financial solution lightly, so you need to be fully informed before you decide on which path to take.

The good news is that there’s a process you can use to determine which option would be the right choice in your situation. Even if you have bad credit, you can still find a way to pay off your debt in full.

Find the best way to consolidate »

Comparing debt consolidation to settlement

If you can’t reasonably afford to pay back everything you owe, even with consolidation, then the next option is to settle for less than you owe. Debt consolidation and settlement often get confused, but these two solutions have very different consequences on your finances.

We have a guide that compares consolidation and settlement side-by-side so you can understand these options for relief and choose the right one for your needs.

Compare consolidation to settlement »

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