Debt consolidation

From: Financial Consumer Agency of Canada

Deciding if debt consolidation is right for you

Debt consolidation is when you combine multiple debts into one. This means instead of paying many different accounts, you make 1 payment.

It may help simplify your finances and make it easier to manage your debt.

Consolidating high-interest debts into a lower-interest product may save you money. However, it may extend your repayment period, costing more in interest over time. If you keep the spending habits that caused your debt, you’ll accumulate more debt.

Before you consolidate your debts, make sure it’s the right option for you.

Use the Debt Solutions Portal to find out if debt consolidation is right for you.

Preparing for debt consolidation

Before you shop for debt consolidation options, prepare yourself. This will help you understand your needs and the impact of debt consolidation on your finances.

Identifying your debts

Create a budget to understand your financial situation. Make a list of what you owe. This will help you identify debts to consolidate.

Learn more about making a budget and assessing your debts.

Checking your credit report

Order copies of your credit reports to review your credit history. A good credit history increases your chances of getting a debt consolidation product with a lower interest rate. A poor credit history may lead to higher interest rates.

You may only qualify for a debt consolidation product with a higher interest rate than your current products. If that’s the case, a debt consolidation will likely increase your debt.

Debt consolidation may help you improve your credit score if you:

make your payments on time
reduce the number of high balance accounts you have

Learn how to get your credit report and credit score.

Choosing a debt consolidation product

Choosing the right debt consolidation product is important for managing your finances and reducing your debt.

Research and compare products and services from financial institutions and debt consolidation companies. Ask them which debts you may consolidate. Make sure you understand the terms and conditions. This will help you determine which products or services best meet your needs.

Learn more about choosing financial products and services that are right for you.

Loans

You may qualify for a loan to pay off your debts.

With a loan, you:

make regular payments
have a fixed or variable interest rate
have a set period to pay it back

Different types of loans may be available to you for debt consolidation:

personal loans: used for various purposes, including debt consolidation
debt consolidation loans: designed for consolidating debt
home equity loans: used for various purposes, including when you borrow against the equity in your home to pay off your debt

Learn more about personal loans.

Learn more about home equity loans.

Lines of credit

A line of credit may be an option to consolidate your debts if you use it responsibly. It allows you to borrow money up to your credit limit.

With a line of credit, you:

pay interest on the money you borrow. This means if you only use part of your credit limit, you pay interest on that part.
typically make monthly payments that cover only the interest on the amount you’ve borrowed. You’re responsible to manage the payment of the principal.
normally have a variable interest rate

Before you get a line of credit, make sure you have the discipline to pay it back. If you continue to borrow from your line of credit, getting out of debt may be difficult.

Different lines of credit may be available to you for debt consolidation:

personal line of credit: used for various purposes, including debt consolidation
home equity line of credit: where you borrow against the equity in your home to pay off your debt

Learn more about choosing the right line of credit for you.

Credit card balance transfers

Many financial institutions offer credit card balance transfers. With this option, they transfer your balance from 1 or more credit cards to a new one. That new card generally has a lower or 0% introductory rate. This promotional rate only applies for a specific period, usually 6 to 18 months.

If you pay off your balance before the end of the promotional period, you’ll:

save money on interests
pay more of your principal, helping you pay off debt faster

You may lose your promotional rate if you miss a payment.

With a credit card balance transfer, you usually pay a fee to transfer a balance. This fee is usually a percentage of the amount that you transfer. You’ll also need to make minimum monthly payments.

Learn more about how credit cards work.

Choosing a debt consolidation provider

Different companies offer debt consolidation products or services. Some debt consolidation options may have higher interest rates than your current debts. Shop around to find the lowest rate.

Remember that applying for loans with different lenders in a short time may lower your credit score.

Financial institutions

Financial institutions offer products to consolidate your debt, such as:

personal loans
debt consolidation loans
home equity loans
personal lines of credit
home equity lines of credit
balance transfers on credit cards

Learn more about choosing a financial institution.