Search
  1. Home
  2. Personal Finance
  3. Is Debt Consolidation Right For You?
Published October 21, 2021

Is Debt Consolidation Right For You?

Debt consolidation combines multiple debts into a single monthly payment. Options include debt consolidation loans, debt settlements and consumer proposals.

It’s easy for debt to spin out of control. You may have outstanding balances on several different credit cards, as well as a number of different loans, a car lease and numerous lines of credit. If this describes your financial situation — debt coming from several different sources that has become unmanageable— then, debt consolidation may be for you.

» MORE: What debt is and how to handle it

Debt consolidation makes debt more manageable

At its most basic, debt consolidation takes all of your debt from various sources and combines it into a single debt with a bigger balance. Debt consolidation allows you to pay down all of your debt with one regular monthly payment rather than trying to manage multiple payments. There are multiple options for achieving debt consolidation.

» MORE: How to deal with a debt collector

Ways to consolidate your debt

Debt consolidation loan

Debt consolidation loans come in various forms — personal loans, and certain types of mortgages and home equity lines of credit — and 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 the lender will simply give you the funds and leave it up to you to pay off your debts. Then, you 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, like your home.

Debt settlement

A debt settlement requires negotiating with your unsecured creditors to pay a lump sum that’s lower than your total balance. In most cases, Canadians work with a debt settlement company to pursue this option. It’s up to each of your creditors to decide if  they want to accept the proposed sum. The debt settlement company may still charge you for their services even if your creditors refuse the settlement offer.

Debt Management Plan (DMP)

A credit counselling service may offer a debt management plan (DMP) that will allow you plan to repay your debt in full over five years. A DMP is generally intended for those who can pay all their debts in full, but don’t qualify for a debt consolidation loan and want to simplify their debts into a single payment over a fixed schedule.

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.

» MORE: Understanding the main types of debt

Why consolidate your debt?

The main reason to consolidate your debt is to make repaying it more manageable. Here are some other reasons you may want to consolidate your debt:

  • You can pay less total interest.
  • You only have to deal with one single monthly payment.
  • You get a definitive end date to your debt.
  • You avoid missed payments.
  • It may help you rebuild damaged credit.

Why not consolidate your debt?

Debt consolidation may not be the right choice if:

  • You only have a small amount of debt.
  • Consolidating debt will result in monthly payment that’s too large for you to pay.
  • You have a credit score too low to be approved for a debt consolidation loan.

About the Author

Aaron Broverman

Aaron Broverman has been a personal finance journalist for over a decade. His work has appeared on such outlets as Yahoo Finance Canada, Bankrate and Creditcards.com, Money Under 30, Wealth Rocket, CBC.ca and Greedyrates.ca. This former Toronto transplant via Vancouver now lives in Waterloo with his wife and son.

DIVE EVEN DEEPER

How to Get Out of Credit Card Debt

Credit card debt can quickly spiral out of control — hurting your credit, affecting family and limiting financial freedom. Here's what to do.

Understanding Your Debt-to-Income Ratio

Your debt-to-income ratio shows how much debt you have in relation to your income. Canadian lenders use DTI to determine how likely you are to repay a loan.

How to Check Your Credit Score and Rebuild Your Credit History

Checking your credit report won’t hurt your credit score. Learn how to check for free in Canada so you can start to rebuild your credit history.

How is Insolvency Different from Bankruptcy?

A person is considered insolvent when they are unable to pay the debts that they owe. It often leads to bankruptcy, but that is not the only solution
Back To Top