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Is Debt Consolidation The Right Solution for You?

  • October 13, 2021

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Feeling a lot of pressure from your debts? You’re not alone. Carrying large amounts of consumer debt has become the “new normal,” but what happens if you start having trouble making your payments, or have so many different accounts that it’s hard to keep them organized and current? And, how do you feel about the high interest rates you may be paying on certain credit cards and payday loans? 

If you are a typical consumer, you acquired these debts when you purchased things you needed – and you told yourself, “I’ll have no trouble paying this off in ‘x’ months.” 

But life has a way of intervening in these plans.

Options for Lowering your Payments and/or Interest Rates 

Debt management has become an important topic for today’s consumer. From simple credit counselling and help with budgeting, to more comprehensive solutions such as consumer proposals and bankruptcy (available if you have become insolvent), there are options for every financial situation. Each one can put you on a better financial footing going forward. 

If you still have the resources to pay your bills, but it’s getting tight and/or too complicated, debt consolidation could be a good option.

Basics of Debt Consolidation Loans 

Debt consolidation in Canada is exactly what it sounds like: all your debts are merged into one account, using a loan from your bank. 

When you approach your bank about a debt consolidation loan, you’ll be invited to sit down with a loans officer and provide information about the credit accounts you would like to pay off with the loan – be they credit cards, payday loans, auto financing, or personal loans from friends or family. The loans officer can advise you on the likelihood of your qualifying for the loan, how quickly you would be required to pay it off, and its interest rate.

What’s good about debt consolidation? 

Life is much simpler when you have fewer bills to pay. If you qualify for a debt consolidation loan, you’ll trade in several payments for just one, and it will be easier not to forget it or neglect to pay it – which in turn will improve your credit rating if you’ve been late in the past.

Also, depending on what type of debts you pay off with the loan, your new interest rate may be lower – especially if you are paying off payday loans or other loans with high interest.

Drawbacks of debt consolidation

One of the drawbacks of debt consolidation in Canada – not a disadvantage, really, but a caution – is that it can be difficult for you to qualify for a debt consolidation loan. Many banks will look at your current financial situation – including amounts owed to creditors – and determine whether you can afford the new loan payments on top of your current payments. Yes, you intend to pay off those other accounts with the loan – but the bank won’t always calculate that way.

This leads to the next drawback: just as the bank fears, you may end up with too much debt. This is because even though you will pay your old accounts off, those accounts (especially if they are credit cards) are very easy to use again.

The final drawback is that, just like with other loans, the bank may require collateral before it can approve the loan. If you use your house or vehicle as collateral (security against the loan), then you could lose your house or car in the event you default on the loan. This is something to consider very seriously

The Bottom Line on Debt Consolidation Loans

If you would like information on other debt management options such as credit counselling, consumer proposal or bankruptcy, start with Bankruptcy Canada’s FAQ page. You can also meet with a Licensed Insolvency Trustee who can help you sort out your options.