9 Best Debt Consolidation Loan Options in Canada


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Ever feel like you’re in over your head in debt? Student loans, credit card debt, line of credit, maybe even a mortgage… 

It’s hard to save for the future and enjoy life now when debt holds such a large claim on your paycheck.

You’re not alone, though. At the end of 2019, the average Canadian household owed about $1.79 in debt for every dollar the household earned. Now, Canadian households are putting almost 15% of their income solely towards their debts.

Not only is it hard to get by with so much debt, but keeping track of each loan and credit card payment is tough — but if you forget to make a payment, you’ll incur late fees and interest.

Consolidating your debt can potentially lower your interest rates, and make your debt more manageable overall.

Each option has different requirements as well as varying effects on your finances and credit score, so evaluate your current debt levels to determine which option is best for you.

1. Debt consolidation loan

  • Interest rates: Banks charge around 7-12% interest. Financing companies charge more — typically 14% for secured loans and up to 30% for unsecured.  Credit score also plays a part.
  • Requirements: Good credit, loan application, collateral for secured loans.
  • Debt reduction: None.
  • Fees: Potential origination fee of 1-5% of loan amount when you take out the loan. Late fees of 4-5% of the monthly payment amount (or a flat fee of $20-$50) if you fail to make payments on time.
  • Credit effects: Hard inquiry will decrease credit score 5-10 points.

A debt consolidation loan is a loan that you take out to pay off some or all of your existing debts. In doing so, you’re effectively lumping these debts together into one big loan. Most lenders offer debt consolidation loans up to $50,000, but some lenders go as high as $100,000.

Debt consolidation loans can either be secured — meaning you need collateral (an item or asset you offer to give up if you default on your debt) or unsecured. Collateral you can use for a secured debt consolidation loan could include your vehicle, valuables (fine art, jewelry, or antiques), retirement savings, or bank accounts.

Since secured loans require you to risk one of your items, they tend to be easier to acquire and have lower interest rates. They are great if your credit isn’t high.

If you have high credit, you’ll have access to more unsecured loans at better rates, though.

To get a debt consolidation loan, you’ll have to fill out an application at the bank or financial institution from which you want the loan. This will trigger a hard inquiry, which decreases your credit score a few points. Only apply to one loan at a time until you’re approved to minimize credit score damage.

When you consolidate your debt with a loan, you’ll often refinance well — meaning you’ll get a lower interest rate on your new loan than the weighted average interest rate you were paying on the old debts. A lower interest rate will help you save a lot of money over the loan term and help you pay it off faster.

Advantages

  • Reduce the number of monthly payments you have to manage
  • Potentially lower interest rate
  • Low fees
  • Potential to pay off debt faster

Disadvantages

  • Good credit score required
  • Slight damage to your credit score
  • May require collateral
  • Without collateral, interest rates can be high

2. Balance transfer credit card

  • Interest rates: 0% or very minimal for the promotional period — usually 12 months or more — then a very high APR when the promotional period ends.
  • Requirements: Great credit. Credit card application.
  • Debt reduction: None. 
  • Fees: Fee of 3-5% of the balance transferred with a minimum of around $5-$10. Some cards may have an annual fee.
  • Credit effects: Hard inquiry will hurt your score by 5-10 points. Paying down your balance and leaving the card open can boost your score slightly.

A balance transfer involves moving one or more debts to a credit card, similar to how a consolidation loan works. 

Balance transfer credit cards are cards that offer a low APR — usually 0% — for a specific time frame, such as 12 months. Companies let you transfer debt up to 70-100% of the card’s credit limit, which can be $3,500-$7,000 for the majority of creditworthy applicants with stable incomes — although each lender has different guidelines, and they look at several other factors such as your existing debts and rent/mortgage payment.

After your introductory time frame ends, the card reverts to a regular credit card APR. Consequently, you want to pay off your balance within that time frame to avoid additional interest.

You apply for a balance transfer card like any other credit card. Fill out an application, then the issuer will conduct a hard inquiry.

Once approved for a card, you can request a balance transfer through your online card account or by calling the company and providing the account numbers from which you’d like to transfer balances. The issuer may approve some or all of the amount depending on your card’s credit limit.

Then, you wait for the balance transfer to process. This could take a few weeks, during which you continue to make payments on your old card. Your card issuer will inform you when the balance transfer has finished.

One thing to watch out when looking for a card is fees. Many balance transfer cards charge 3-5% of the total balance you’re transferring, usually with a $5-$10 minimum. For example, if you were moving $2,000 in debt to your new card with a 3% balance transfer fee, the company would tack $60 onto your balance. 

Additionally, some cards may charge annual fees. If you open one of these, pay off your balance as fast as possible and close the card to avoid paying the annual fee.

Advantages

  • 0% APR (or very minimal APR) for a long time
  • More of your payment goes towards your balance
  • Reduce the number of monthly payments you have to manage
  • Payment flexibility
  • Earn cashback points on purchases
  • Can boost your credit score once your balance gets low

Disadvantages

  • Usually requires a healthy credit score
  • Credit limits
  • Potential to put yourself deeper in debt
  • No fixed repayment, so you must ensure you’re on track to pay off your balance
  • Balance transfer fees
  • High APR if you fail to pay off your balance in time
  • Extremely high penalty APR if you fail to pay the minimum on time

3. Personal line of credit

  • Interest rates: Quite low, based on the Bank of Canada’s Prime Rate. As of March 5th, 2020, the Prime Rate is 3.45%.
  • Requirements: Strong credit score and income. Secured credit lines require collateral. You must apply for a line of credit.
  • Debt reduction: None.
  • Fees: Maintenance fees, late payment fees, returned payment fees.
  • Credit effects: Hard inquiry will decrease your credit score 5-10 points.

Lines of credit aggregate the best features of credit cards and loans in one package. This form of debt is an open-ended loan that you can borrow money against — up to your credit limit — when needed. 

The interest rates on lines of credit are based on the Bank of Canada’s Prime Rate — usually, lenders add a few percentage points to the Bank of Canada’s prime rate to arrive at your credit line rate.

For example, if the Bank of Canada set the Prime Rate at 3%, a lender might offer you Prime + 2%, which comes to 5%.

As such, lines of credit are a double-edged sword. You can save a lot of money when the Prime Rate is low, but if the Bank of Canada ever has to raise it, you’ll suddenly owe a lot more interest on each payment.

That being said, secured lines of credit have the lowest interest rates. 

Applying for a credit line is a similar process to applying for a loan or credit card. Lenders want to see a good credit history, a low debt-to-income ratio, and a positive net worth.

Depending on the institution that you borrow from, you can access your funds by visiting your local bank branch, using a mobile banking app, or performing an electronic funds transfer. You may also be able to draw on your credit line by writing a cheque.

Advantages

  • Low interest rates
  • Flexible monthly payments
  • You can use it whenever you need it

Disadvantages

  • Increases in the Bank of Canada’s Prime Rate can increase your interest rate
  • Potential fees
  • Temptation to spend
  • Healthy credit score and income required

4. Home equity line of credit (HELOC)

  • Interest rates: Low, typically 2-5%. 
  • Requirements: Sufficient equity in your home, sufficient debt-to-income ratio, good credit. The application requires that you gather a lot of financial documentation and get your home appraised.
  • Debt reduction: None. 
  • Fees: Several fees that may add up to a few thousand dollars.
  • Credit effects: Hard inquiry will decrease your credit score 5-10 points.

A home equity loan, sometimes called a second mortgage, is a loan you can take out from a bank against the equity of your home — the portion of the home you own. For example, if a bank believes your home to be worth $200,000 and your mortgage is currently at $120,000, then you have $80,000 equity in your home because you paid off $80,000 of the money you borrowed.

Since you’re using your home as collateral, you’ll be able to acquire a large amount of money and get a lower interest rate. In the previous example, you could theoretically take out $80,000 against your home — although you likely won’t have enough debt to warrant such a large loan.

Applying for a home equity loan is a fairly lengthy process, following the same general steps. 

You first fill out an application, on which the lender will ask for a lot of documentation detailing your income, expenses, and other financial information. If your initial application is approved, you’ll have to get your property appraised to determine your equity.

From there, an underwriter approves your application. You then close on the loan by signing paperwork and pay any accompanying fees.

Every lender has a slightly different process, so speak to each bank and lender before making a decision.

Advantages

  • Low interest rates
  • Flexible repayment
  • Lower payment (due to the lower interest rate)

Disadvantages

  • Sufficient equity in your home required
  • Potential high costs and fees
  • Failure to pay off the loan means you could lose your home

5. Debt management program

  • Interest rates: Low to 0% rates if working with a nonprofit credit counsellor.
  • Requirements: Creditors must agree to the debt management program as proposed by your credit counsellor.
  • Debt reduction: Does not reduce principal amount, but due to the lower interest rate, your total monthly payment will be lower.
  • Fees: Nonprofit counselling organizations charge low fees.
  • Credit effects: Stays on your credit report for 2-3 years after you finish the program.

If your credit isn’t high, it will be hard to get a loan, balance transfer card, or line of credit — and even if you do, the interest rate may be unmanageable. 

In this case, a debt management program could be a great option. 

Debt management programs are repayment options offered by credit counselling organizations. Under a debt management program, you consolidate all of your debts into one monthly payment that you pay to a credit counselling agency. 

Most creditors will be fine with one of these programs as long as you work with a non-profit because it increases the chances they’ll earn some revenue.

Starting a debt management program involves talking with a credit counsellor about your current situation. They then send your creditors a proposal outlining your case for enrolling in one of these programs.

Once your creditors approve the program, you begin making your payment towards your chosen credit counsellor. This process continues for up to 5 years, at the end of which you should be free of all applicable debts. Most people pay off their debts before 5 years, though.

Try to work with a non-profit counselling agency. Creditors won’t extend you the low or 0% interest rate often if you enroll in a debt management program through a for-profit entity.

Advantages

  • Eliminates all eligible debt
  • Low or no interest
  • Consolidates all debts into one easy payment
  • When working with nonprofits, you have access to free educational resources for credit and personal finance issue

Disadvantages

  • Not legally binding, so creditors can opt out at any time
  • Cannot open new credit cards or credit lines
  • Affects credit score for a long time
  • For-profit credit counsellors may charge hefty fees

6. Debt settlement

  • Interest rates: Stays the same.
  • Requirements: Generally, you must have more than $10,000 in unsecured debt. Also, you must demonstrate the ability to make a sufficient monthly payment negotiated under the settlement plan.
  • Debt reduction: Up to 80%.
  • Fees: Typically a percentage of the amount settled. Non-profit services tend to charge less than for-profit services. Also, for-profit services may try to charge you upfront fees.
  • Credit effects: Significant. Stays on your credit history for 6 years. The more debt you’re writing off, the more substantial the impact on your score.

Debt settlement involves negotiating with your creditors to settle your debts for less than the total amount you owe.

In theory, you can just call up your creditors and ask them to settle.

In practice, most creditors will say no.

Instead, the best way to get a debt settlement is through a debt settlement organization. These organizations have experts that negotiate settlements on your behalf.

There are two types of debt settlement organizations: for-profit and nonprofit organizations.

You’ve probably seen many more advertisements for the former than the latter.

Many people are persuaded by the fantastic promises that these for-profit companies make in their advertisements. 

When they sign up, they’re told that they can stop making payments to their creditors while the settlement company negotiates. Instead, they can redirect those payments to an account so the debtor can save up for a lump sum settlement.

All for a hefty upfront fee.

Unfortunately, for-profit organizations cannot guarantee a debt settlement, despite their lofty and enticing promises. 

In fact, the US Government Accountability Office found that less than 10% of these companies were able to successfully negotiate their clients’ debts.

To make matters worse, you won’t get your fee back, even if the company fails to negotiate a settlement for you.

Additionally, these companies fail to disclose to you that creditors don’t have to tolerate your ceasing of payments. You’ll still incur late fees and interest — and your creditors can take collections or court action against you.

For several of these reasons, the US government made it illegal to charge upfront fees for debt relief services, among other regulations in the debt relief industry.

These companies then began advertising in Canada, hoping to acquire more clients that haven’t heard of these disastrous consequences. Legislation similar to what the US enacted exists in Canada, but debt settlement companies find ways to work around the law, so be very careful when picking an organization.

With all of this in mind, non-profit organizations might be a better option. Since profit is not their motive, they are more thorough with ensuring your situation calls for a debt settlement. Plus, non-profit organizations will only charge a percentage of the settlement amount — and only when it’s settled.

Advantages

  • Can drastically reduce your debt amount
  • With reputable companies, you don’t pay fees unless the debt is settled

Disadvantages

  • Significant credit score damage
  • No settlement guarantee
  • Creditors can take collections or legal action against you
  • For-profit debt settlement companies may use high-pressure sales tactics
  • For-profit services may charge you upfront, non-refundable fees
  • The for-profit success rate is less than 10%
  • You can accrue interest and late fees while paying to your debt settlement account

7. Consumer proposal

  • Interest rates: 0%. Freezes interest on your debts.
  • Requirements: You must be able to afford to pay a portion of your debts;
  • Insolvency — meaning you must have more debt than assets/you can’t keep up with debt payments — and your unsecured debt must not exceed $250,000
  • Debt reduction: Up to 70%.
  • Fees: About $1,500 to file plus a monthly fee of 20% of your proposal payment — this fee goes to the trustee.
  • Credit effects: Significant reduction of your credit score.

If you’re feeling overwhelmed by your debts and the previous choices aren’t enough to help, then a consumer proposal might work for you.

This method of consolidation entails sending your creditors a proposal to pay only a percentage of your debts and have the rest forgiven.

As explained below, creditors can refuse. However, this doesn’t often happen because consumer proposals guarantee some income from you. If you were to go bankrupt, creditors might earn even less than the reduced amount you pay under a consumer proposal.

Additionally, you cannot use a consumer proposal to get rid of secured debts, student loans younger than seven years, child support, court fines, and penalties.

To file a consumer proposal, you have to contact a Licensed Insolvency Trustee (LIT). The Canadian government has a Licensed Insolvency Trustee lookup tool to make this easier. 

Your LIT reviews your finances and explains your options for consolidating and reducing debt. When you opt for a consumer proposal, the LIT will work with you to file a proposal that works for you and your creditors.

Once your LIT files your proposal with the OSB, you stop paying your unsecured creditors. Collections calls and wage garnishments end as well.

Your LIT will also send your proposal and a report of your financial situation to each of your creditors.

Your creditors will have 45 days to accept or refuse the proposal. Any creditor or group of creditors with a total of 25% of your debt can call a meeting at which they vote. If they don’t call a meeting within 45 days, you’re good to go.

If they do call a meeting, the creditors must come to a simple majority vote to refuse your proposal — votes are based on dollars. If you owe $100,000 total and creditors entitled to $50,001 vote no, then your proposal is rejected by everyone.

Otherwise, your proposal is accepted, and you begin making your reduced debt payments. You’ll also have to attend two financial counselling sessions.

Pay off your debts and follow the other rules in the proposal, and the rest of your applicable debts will be released.

Advantages

  • Can reduce up to 70% of your debt
  • Freezes interest
  • Ceases wage garnishments and debt-related lawsuits
  • Avoids bankruptcy

Disadvantages

  • Creditors can vote to refuse your proposal
  • Significant credit score damage
  • Stays on your credit report for a long time
  • Failure to make payments revokes your proposal
  • Initial and ongoing fees
  • Some debts are immune to consumer proposals

8. Borrowing from friends and family

  • Interest rates: No change in interest rates.
  • Requirements: Asking family and friends for help.
  • Debt reduction: Varies depending on how much family and friends help you.
  • Fees: None.
  • Credit effects: None.

When all options but bankruptcy are off the table, your family and friends might be able to help you out. For obvious reasons, you won’t have to deal with credit checks, fees, or credit damage.

But a commodity more valuable than money is relationships — and money can strain or damage your relationships with friends and family.

Unfortunately, borrowing money from family and friends can strain your relationships with them. If you’re unable to pay back the loan, the lender will either have to forgive the debt and take a loss to keep the relationships, or insist on repayment — and potentially eliminate the relationship between you two.

Your family especially may value your relationships too much and will consequently refuse to lend you money and complicate the relationship. 

Even if a friend or family member does lend you money, you may be putting undue stress on them. They may need the money for their own expenses, yet feel guilty saying no to you.

Although borrowing from friends and family could work for some people, it can be detrimental to others — even if their friends and family are willing to lend.

Advantages

  • No credit checks, applications, or other formal steps
  • Very likely to obtain financial help

Disadvantages

  • Potential embarrassment
  • Your family and friends might not help you as much as you need
  • Can strain or ruin relationships
  • May put undue financial stress on family or friends that lend to you

9. Personal bankruptcy

  • Interest rates: None. Eliminates debt.
  • Requirements: Owe at least $1,000 in unsecured debt, be unable to pay your debts when they’re due, and owe more in debts than the value of your assets.
  • Debt reduction: All debts barring a few exceptions — but the type of discharge determines when this happens.
  • Fees: At least $1,800, made in $200 monthly installments.
  • Credit effects: Major. Does significant damage to your credit score. Stays on your credit report for six years.

Bankruptcy is a last resort option if none of the above choices will adequately consolidate your debt. When your bankruptcy filing is approved, nearly all of your unsecured debt is discharged. Like with a consumer proposal, you receive a stay of proceedings that stops your creditors from calling you.

Additionally, all wage garnishments except those from the Family Responsibility office end.

Each of these can be of great help when you’re in over your head, but bankruptcy comes at great cost — primarily to your assets. You do get to keep certain assets — called exempt assets — up to specific dollar values. Some of these include your car, clothing, and household furnishings. 

However, you lose all of your non-exempt assets — as well as your tax return for the year in which you’re filing for bankruptcy.

A bankruptcy hits your credit score significantly as well. Your first bankruptcy stays on your credit report for six years, and your second jumps to 14 years.

With that said, your credit score likely isn’t great in the first place if you need bankruptcy to escape your debts. The clean slate that bankruptcy provides allows you to build your credit without juggling several debts. 

Filing for bankruptcy is a long process, starting the same way as filing for a Consumer Proposal would. You meet with the LIT first to review your financial situation, then they provide you with forms on which you list your personal information, creditors, and assets.

With the paperwork filed, your creditors will stop calling you. Your non-exempt assets are assigned to your LIT for sale to pay your creditors — you are not allowed to sell them. Additionally, you’ll pay some of your income to your trustee on a monthly basis.

Before discharge, you may have to meet with creditors or the OSB so they can get more information about the circumstances surrounding your bankruptcy.

You’ll also be required to attend financial counselling sessions.

Eventually — depending on the circumstances surrounding your bankruptcy — all debts except for a few exceptions will be discharged. These exceptions include student loans younger than seven years, alimony, child support, court fines, and penalties.

You’ll receive one of four discharge types:

  • Absolute — Automatic discharge of all applicable debts.
  • Conditional — You must meet certain conditions before receiving a discharge.
  • Suspended — You will receive your discharge on a future date.
  • Refused — This is rare. If your discharge is refused, you’ll have to work with your trustee to find a way to have your debts discharged. Otherwise, you’ll have to reapply for bankruptcy at a later date.

Throughout the whole process, you must submit your monthly household income and expenses, as well as changes in your family situation.

Bankruptcy should only be used as a last resort — when you’re deep in debt and you don’t make enough income or have enough assets to easily climb out.

Advantages

  • Harassing calls from creditors cease
  • All wage garnishments except for those from the Family Responsibility Office end
  • Barring some exceptions, you’re debt-free

Disadvantages

  • Significant credit score damage
  • Remains on your credit report for a long time
  • Costly
  • Loss of many assets
  • Some debts are immune to bankruptcy
  • A lengthy process with several requirements

What to read next

References

Over to you

Let us know — have you used any of these options to consolidate your debt? How did it go? Are there any debt consolidation options you’ve used that we didn’t discuss? Let us know in the comments below.

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