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The coronavirus pandemic has thrown the finances of many Canadians into chaos. Find out how consolidation loans work and whether a debt consolidation loan is the right choice for you.

No matter what your income level is or how diligent you’ve been about saving money, COVID-19 effects on stock markets, job security and child care have pushed many cash-strapped families into financial hardship. Luckily, a debt consolidation loan could help provide some much-needed relief. If you’ve got high-interest debt, here’s everything you need to know about consolidation loans.

How Does A Debt Consolidation Loan Work?

Debt consolidation is a popular financial tool that lets you combine all of your high-interest, unsecured debts from a variety of sources like credit cards, bills, student debt, personal loans and more into a single, larger but more manageable debt load. The idea is that your new consolidated debt obligation (which can take different forms, as outlined below) will be easier to pay back because of a lower interest rate and the need to make only one monthly payment instead of multiple payments.

There are numerous debt consolidation options available to Canadians. The one that works best for your financial situation will depend on things like your credit rating, your assets and your desire to decrease your overall debt load. Before you apply for a loan, it would be wise to check your own credit score through a platform like Borrowell, which offers the service free.

Why Consolidate Your Debt Using a Debt Consolidation Loan

A debt consolidation loan means borrowers can take out a loan from a financial institution and use the funds to pay back various creditors, like credit card and utility companies, over a specified repayment period. Once your other obligations are paid, you will have to manage one debt. It’s crucial that the loan you get to pay off creditors has a lower overall interest rate than your other debts. A lower interest rate allows you to get out of debt sooner.

Banks and credit unions offer personal loans to consolidate debt; however, they primarily tend to give secured loans. It can be very difficult to borrow from a traditional lender without collateral (like a house). Banks also generally want long credit histories and solid credit ratings.

Overall, for a debt consolidation loan, alternative financial institutions are your best bet, especially if you’re looking for a loan but have a history of bad credit. For example, Loans Canada is an online loan platform with access to the largest lender network in the country. Depending on your credit history and income, you can borrow as much as $50,000 with APRs from 2.99% to 46.96%.

Another solid option is LoanConnect, which also provides loan quotes from a variety of providers, and offers quick cash in as little as 12 hours. Interest rates range from 10% - 46.96%.

If you’re in a consumer proposal, you might want to consider Fast-Track, a loan from financial technology company MyMarble.ca that pays off your bankruptcy so you can start increasing your credit and get mainstream and affordable financing. Rates are between 18.99% and 24.99%. FYI: due to the COVID-19 economic situation, Marble won’t be funding Fast-Track loans until early 2021. Applications are still being accepted, but won’t be processed until early 2021.

If you are having a hard time securing a loan elsewhere, LendingMate is worth considering. While the interest rates are very high (either 34.9% or 43% depending on what province you live in), it is one of the few lenders that provide loans up to $10,000 to those with bad credit ratings. Borrowers must, however, provide a guarantor who will be responsible for your loan if you default. For more info, take a look at The Best Bad Credit Personal Loans in Canada to weigh your options.

Learn more about LoanConnect

Pros and Cons of Debt Consolidation Loans


  • Easier to manage with only one monthly payment
  • Saving money due to lower interest rates for a debt consolidation loan
  • Having an end goal since repayment is required within a set period (usually 2 to 5 years)
  • Minimal fees (if any)
  • Accessible to borrowers with a poor credit rating and/or no collateral


  • Potential to go much deeper into debt, if not disciplined about regular payments
  • Many lending requirements from major banks
  • Unsecured loans from alternative lenders mean higher interest rates
  • Guarantor necessary for those with very bad credit rating

Interest Rates for Debt Consolidation Loans

There is an incredibly wide range of interest rates available for debt consolidation loans. The rates you’ll be offered depend on a variety of factors like your credit history, income and overall net worth. Though banks and credit unions tend to offer the best APRs (7% to 12% on average), they also usually want some form of collateral to approve a loan. Because alternative lenders are frequently more flexible regarding your credit rating and are much more willing to make unsecured loans, they have higher interest rates, ranging from 3% to 47%.

Consolidating Debt Using a Home Equity Loan

If you’re a homeowner, you have the option of debt consolidation via a home equity loan (sometimes also referred to as a second mortgage or refinancing a mortgage). A financial institution will lend you a lump sum of money based on your home’s equity. Equity essentially means what your home is worth on the market minus any outstanding mortgage payments. So, for example, if your home is valued at $500,000 and you have $200,000 worth of payments remaining, the equity of your home would be $300,000.

Banks in Canada will offer you a loan up to 80% of your home’s equity and then you repay the loan in fixed amounts over a set time period. While this option may seem attractive and can give you access to more money than an unsecured debt consolidation loan, applicants need a credit score of at least 620. Furthermore, the ramifications of defaulting on a HEL are serious. Because you’re using your house as collateral, the bank could foreclose if you don’t keep up with payments. You could potentially lose your home, so a HEL should not be undertaken lightly.

Traditional banks are often more popular for HELs than alternative financial institutes. This is because they offer lower interest rates, have brick-and-mortar offices where you can meet in-person with someone who has plenty of experience with mortgages (especially important when risking your most valuable asset).

Pros and Cons of a Home Equity Loan


  • Because the loan is secured, interest rates are often lower
  • Access to a potentially large amount of money
  • Flexible repayment plans because you may be allowed to extend your amortization (loan repayment period)


  • You must have a reasonable amount of home equity
  • The application process is longer and more complicated than an unsecured loan
  • Must have a credit rating of at least 620
  • Banks and alternative lenders may charge fees
  • If you fall behind on payments, you could lose your home

Interest Rates For Home Equity Loans

Canada is presently experiencing historic low-interest rates, which is good news for anyone looking into debt consolidation. These low rates are attractive to those looking to refinance a mortgage because they make mortgage payments easier to manage. Depending on a variety of factors (like how long you amortize your home equity loan), you’ll find rates between 3% to 5%. Just don’t let those low rates make you overconfident about carrying a large debt load. Rates can fluctuate wildly and you want to make sure you can still handle the loan if APRs go up.

Some alternative lenders also offer mortgages. Expect interest rates to be higher (anywhere between 13% to 30%) because these companies are more willing to take on borrowers with less-than-stellar credit ratings.

Consolidating Debt On Your Credit Cards

Credit cards are not the first thing that pops into most people’s minds when they think of eliminating debt. Yet consolidating debt on a credit card can be an excellent option if you’re carrying mainly credit card debt and can move it onto one single card. There are two main ways to do this:

You can take advantage of a credit card with a balance transfer promotion. Periodically, some credit card companies will feature a balance transfer promotion allowing you to transfer all of your debt from other high-interest credit cards to a single card with a temporary low-interest or interest-free period. (There is often for a fee of 3% of the total amount transferred.) The goal is to pay off the transferred credit card debt during the promotional period without accruing more high-interest debt. As long as you’re really dedicated to tackling your debt, balance transfer cards can save you hundreds of dollars on interest and provide you with some much-needed breathing room to pay off what you owe. For all the details, take a look at How to Transfer a Credit Card Balance Wisely.

Or you can sign up for a low-interest credit card. Many Canadian consumers aren’t aware there are credit cards with low-interest rates as one of their standard features. These cards are ideal for those who may require more time than a temporary low-interest promotional period to pay down their credit card debt. Though these low-interest credit cards may charge an annual fee, the fee is negligible if you consider how much it could save you on interest payments.

As long as you make regular payments on time, either is an effective strategy for paying off credit card debt faster.

Pros and Cons of Consolidating Debt On Credit Cards


  • It’s like having a low-interest or interest-free loan for a short amount of time
  • Fees tend to be minimal, usually 3% of the transferred amount
  • All credit card debt is in one place rather than on multiple cards, making it easier to manage
  • Payment flexibility – increase or decrease payments as needed month-to-month


  • If you don’t pay off your debt in the allotted time, you could pay interest rates as high as 20% or more – potentially much more than a personal loan
  • Must be disciplined about paying down debt and not allow having a card with a low interest rate encourage you to spend more money
  • Low-interest rate credit cards often require good credit ratings and may have annual fees

Interest Rates On Your Credit Cards

Interest rates for balance transfer promotions can be as low as 0% up to 1.99% (though sometimes more) for a set period of time, often anywhere from six to 10 months. Note that once that promotion ends, the credit card debt you transferred will be subject to the card’s normal APR.

Loan Payoff Calculator

Main Reasons Why People Are Declined For Debt Consolidation

Debt consolidation is not an option that will suit everyone, and it’s also not accessible to all. If you have a terrible credit rating, a huge debt load, a history of defaulting on repayments, or a low income, a lender may not consider you a good candidate for debt consolidation. Getting a personal loan may be a better option under those conditions.

The Final Word

Debt consolidation can be a wonderful tool for people overwhelmed by debt. It can make life easier by having just one monthly payment to focus on, instead of trying to manage multiple debts spread over different credit cards. Debt consolidation can be used wisely and responsibly to help you navigate your way through difficult financial situations.

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