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A debt consolidation loan is a personal loan intended to pay off all of your debts at once. A debt consolidation loan is usually offered by a lender to streamline your debt repayment process. They give you a single debt to pay off, instead of many, and generally with a lower overall interest rate. You’ll use the money issued by your debt consolidation loan to pay off your various debts (including credit cards, personal loans, and other debt) and then make a single monthly payment to your debt consolidation loan lender.
If you have several different types of debt at higher interest rates (for example, multiple credit card balances) and are having trouble staying on track with your debt repayment, a debt consolidation loan can help. A debt consolidation loan will streamline these debts into a single loan with a single payment at a lower interest rate. You’ll save money every month on interest charges, and you can focus on a single debt, instead of choosing how to prioritize your monthly payments and deciding which debts to eliminate first.
“Good” and “bad” kinds of debt are a common way to classify various debts. Good debt, when managed properly, is debt that helps you build equity or improve your professional prospects – like a mortgage or student loans. Bad debt is generally considered any consumer debt, such as credit card debt, car loans, or line of credit debt, that can accumulate quickly if not managed properly. Bad debt is often accumulated by daily overspending, and not in the pursuit of improving your financial situation.
Debt consolidation loans are often used for debt relief to pay off bad debt that has gotten out of hand. For example, if you have accumulated thousands of dollars in credit card debt over the years, a debt consolidation loan can help you consolidate your debts into a single loan with a lower interest rate.
You can consolidate a wide variety of debts when you apply for a debt consolidation loan. These types include:
While debt consolidation can be extremely helpful, not all forms of debt in Canada can be consolidated. Forms of debt you can not consolidate include:
To qualify for a debt consolidation loan, you’ll need to prove to your lender that you are likely to pay it back. Your lender will request the following details to make this determination:
Yes, there are ways to get a debt consolidation loan with bad credit. A general guideline is that credit scores over 660 have the best chance of getting approved for a debt consolidation loan.
If your credit score is below 660, there may still be debt consolidation loan options available. Certain lenders specialize in helping Canadians with lower credit scores consolidate their debts and improve their credit health over time. Sign up for Borrowell to see what loan options are available based on your credit score.
You can apply for a debt consolidation loan through most credit unions, banks, and online lenders. When applying online, the process is usually straightforward and can be as fast as 15 minutes. Your loan approval can happen as quickly as 24 hours, and you could have money in your account in as little as a few days after that.
If you’re not sure where to apply, you can easily compare lenders online. Sign up to Borrowell for free and easily compare debt consolidation loan options from trusted Canadian lenders. You can compare interest rates and see your likelihood of approval based on your credit score. This will help you find the best lender and debt consolidation loan option that matches your credit profile.
Your credit score is one of the main criteria for qualifying for debt consolidation loans. To make the application process easier, you should know what your actual credit score is before applying for a loan. With Borrowell, you can quickly check your credit score for free to speed up the process.
When lenders check your credit score, it is recorded on your credit report as a “hard inquiry.” Hard credit inquiries temporarily lower your credit score, and applying for many loans at once results in multiple hits to your credit score. To protect your credit score, you should only apply for loans that you’re confident you’ll qualify for.
To minimize impacts to your credit score, you want to make sure you apply for a loan that you'll likely get approved for. Borrowell helps protect your credit score by showing you your likelihood of approval for recommended loan offers, based on your credit score.
Sign up and get your free Equifax credit score in just 3 minutes. Your credit score is updated on a weekly basis, and checking your score won't hurt it!
Your credit profile is automatically matched with the best loan products for you. Select your offer and complete the online application through the platform.
Once you are approved through loan partners, you can usually get access to funds in a matter of days.
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Yes, it's really free. Borrowell provides you with your Equifax credit score, free of charge. Based on your credit score, we provide you recommendations on the best loans, credit cards, and financial products that you are likely to qualify for. Knowing your credit score speeds up the loan application process and helps you get your money as quickly as possible.
Borrowell works with over 50 trusted lenders to help you find loans that will fit your unique financial profile. Borrowell connects you to lenders offering a wide variety of loans, including debt consolidation loans. You can also use Borrowell to track your credit score and receive personalized recommendations on building your score and qualifying for the best possible loan interest rates in the future.
A debt consolidation loan can actually help you improve your credit score. Making consistent, on-time payments towards your consolidation loan every month will build up your repayment history, which is a main factor of your credit score.
However, if you don’t manage your loan properly, you could negatively impact your credit score. Late payments can have a big impact on your credit score — even up to a 150 point decrease.
Also, if you apply for multiple debt consolidation loans at once, your credit score may be impacted in the short term. When you apply for loans and lenders check your credit score, it’s recorded on your credit report as a “hard inquiry.” Hard credit inquiries temporarily lower your credit score, so applying for many loans at the same time results in multiple temporary hits to your credit score.
Secured or unsecured debt refers to whether you have an asset backing your loan or not. A secured debt is backed by an asset you own, such as your car or home. Secured debts are less risky to lenders and so tend to have lower interest rates. Unsecured debts are not backed by an asset, and instead, the lender is relying on their judgment to determine whether you will pay your debt.
Debt consolidation loans are available as both secured and unsecured debts, depending on the lender you choose. If you have an asset that you can use as security, your loan will have a lower interest rate. Keep in mind, however, that if you default on your loan, your lender can seize your asset as payment.
Debt consolidation loans have several advantages over paying off multiple debts in sequence, including:
There is one significant disadvantage when it comes to applying for a debt consolidation loan, and that’s not changing your habits. Before you take out a debt consolidation loan, carefully consider why you need one in the first place. For example, if you have experienced various emergencies and you've racked up debt, then a debt consolidation loan is a good option because the debt is due to a specific event.
However, if your debt is due to regular overspending, it’s essential to realize that your debt is a symptom of a more significant problem. Unless you address that problem, you’ll most likely end up in the same position in a few years and require more stringent forms of debt relief.
While most debt consolidation loans are personal installment loans, there are other options for consolidating your debt.
Qualifying for a debt consolidation loan is more difficult if you have a low income, but it can be done with specific lenders. If you don’t qualify for a regular debt consolidation loan, you could consider a balance transfer credit card, as we mentioned above. Alternatively, a low interest credit card could be a good option if your debts are primarily high interest credit cards or payday loans.
If you can’t take on new debt to pay off your existing debt, then strict budgeting and earning extra money can help you get out of debt on a low income. If this doesn’t work, consider credit counselling or debt relief programs.
Get out of debt sooner with a debt consolidation loan. Sign up to get your free credit score and we'll use your credit profile to show your best loan options.
A debt consolidation loan can be a great option if you're managing multiple debts. If you have bad credit, you can likely still qualify for a debt consolidation loan, but your options will be more limited.
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Debt consolidation can help you lower your monthly payments and get out of debt sooner, but you should be aware of how it impacts your credit score. Applying for debt consolidation loans can cause a temporary dip in your credit score, but making on-time payments towards a debt consolidation loan can help you increase your credit score in the long-term. In summary, debt consolidation can help you build your long-term credit score when used properly.
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