Is Debt Consolidation Right for You?

Debt consolidation takes various debts and combines them into a single debt with a bigger balance.

If your debts have become hard to manage — or you’ve started getting past-due notices — debt consolidation may help you regain control before the debt is turned over to a collection agency.

Consolidating your debt can help you turn multiple debt bills into one, making it easier to manager and possibly saving you money on interest.

Ways to consolidate your debt

Personal loan

One common way to consolidate debt is through the use of a personal loan. These are offered by banks, credit unions and private lenders. The institution you receive the loan from will either use it to pay off all your various debts or will simply give you the funds and leave it up to you to pay off your debts. Then, you’ll start paying back the debt consolidation loan according to its terms and at the agreed upon interest rate. Your rate is determined by your credit score and, if required, the quality of your collateral.

Home equity loan or line of credit

If you own property and have a significant amount of equity, you may also be able to consolidate your debt through the use of a home equity loan or line of credit, sometimes called a HELOC. These products allow you to turn home equity into cash, at an interest rate that’s typically lower than a credit card or payday loan.

HEL or HELOC funds are then used to pay off several high-interest debts, and you make payments on the one second mortgage or line of credit. This method of debt consolidation should be approached with caution, however. Because your home will be the collateral for the loan, you risk losing it if you can’t make payments.

Balance transfer credit card

While it’s not quite the same as traditional debt consolidation, in which many debts are combined into one, a balance transfer credit card can be used to turn high-interest credit card debt into low- or no-interest debt — at least temporarily.

A balance transfer allows you to move your entire credit card balance from one card to another. The new card will likely offer an introductory period, such as 12 months, in which the interest rate is 0%. This gives you some time in which to apply your payments entirely to the principal debt, reducing your balance faster than if you were paying interest.

Debt Management Plan (DMP)

A credit counselling service may offer a debt management plan (DMP) that will show you how to repay your debt in full over a set number of years. A DMP is generally intended for those who can pay all their debts in full, but may not qualify for a debt consolidation loan.

Consumer Proposal

If your debt has become unmanageable, but you want to avoid filing for bankruptcy, a consumer proposal may be a good option. A consumer proposal is a legally-binding agreement facilitated by a licensed insolvency trustee. The trustee will distribute a lower than what you would normally owe lump sum monthly payment to all your creditors. Consumer proposals have a negative impact on your credit score and report, but may be preferable to bankruptcy.

Reasons to consolidate debt

Consolidating your debt can make repaying it more manageable, but that’s not the only benefit of doing so. Here are some other reasons you may want to consolidate your debt:

Mounting debt can feel overwhelming, regardless of your income or the type of debt. The most important thing to remember is that debt relief options like debt consolidation exist, and taking action early is always better than avoiding it.

Can consolidation help if I'm already being contacted by debt collectors?

Once a debt is sold or transferred to a collection agency, consolidation may still help — but you might have to negotiate the debt amount or repayment plan first.

Be sure that any collector contacting you is legitimate before agreeing to a repayment plan.

You have rights — and debt collectors have to follow the rules.

If an agency is aggressive or unprofessional, you can file a complaint through your provincial or territorial consumer affairs office.

» LEARN MORE about how to deal with debt collectors