How to consolidate debt

What is debt consolidation?

Managing multiple types of debt can be overwhelming and stressful. Debt consolidation can help you simplify it by combining two or more debts into a single monthly payment.

You have many options for consolidating debt in Canada, which we’ll explore below. The best ones for you will depend on the type of debt you have: secured or unsecured.

Secured debt: This is when you borrow money against an asset you have, such as a home or a vehicle. The asset serves as collateral for the loan, meaning that if you default on your debt payments, the lender has a legal claim on the asset.
Unsecured debt: This is a loan that doesn’t require collateral. Examples of unsecured loans include credit cards, unsecured lines of credit, medical bills, student loans, payday loans, and utility bills.

Six types of debt consolidation strategies

These are the most common debt consolidation methods. As you’ll see, some of them are only available to people with unsecured debt.

Credit card balance transfer: You can negotiate with your bank or credit card provider to lower the interest rate or transfer your current balances to a new card with a lower interest rate. However, the renegotiated/new rate may be temporary, and creditors may charge a percentage of the transferred balance as a fee, so make sure you read the fine print.
Debt consolidation loan: This option is available through a bank or financial institution. Instead of owing substantial balances on multiple credit cards, individuals can pay them all off with a debt consolidation loan, then repay that loan with one monthly payment. Typically, a debt consolidation loan can only be used for unsecured high-interest debts. While it is possible to find a lender that will include secured debt, such as a mortgage or car loan, it’s usually not beneficial, as these types of debt tend to have comparatively low interest rates. Debt consolidation loans typically have an interest rate between 8% and 12%.
Debt consolidation program (DCP): This is an alternative to a debt consolidation loan. Clients work with a non-profit credit counselling agency, which will negotiate with creditors on their behalf to lower the interest on unsecured debts while also combining unsecured debts into a single, lower monthly payment. Only unsecured debts can be included in a DCP.
Home equity loan: If you own a home, you may be able to obtain a home equity loan, which is backed by your property as collateral. The amount of the loan will depend on the valuation of the home. Home owners can borrow up to 80% of the appraised value of their property, minus any mortgage outstanding.
Reverse mortgage: If you’re 55 or older and a home owner, you could consider a reverse mortgage, also known as an “equity release.” You can borrow up to 55% of the current home value while retaining ownership. The loan must be paid back if you sell, move or pass away.
Line of credit: If you qualify for a line of credit, you can use this to pay off a higher-interest debt such as a credit card balance. Keep in mind that if the line of credit is secured, then you’re backing it with an asset—such as your home, in the case of a home equity line of credit (HELOC). You could lose that asset if you aren’t disciplined with your payments.

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Do I qualify for debt consolidation services?

The debt consolidation options available to you depend on several factors, including your assets, types of debt, credit score, level of income, and expenses. Generally, if you find that your debt (excluding secured debts) exceeds 20% of your income, then you may find it helpful to receive professional advice from a non-profit credit counsellor to better manage your debt.

When asked about who would benefit the most from a debt consolidation program, credit counsellor Randolph Taylor says that it’s for “those who have debt that they’re having difficulty paying down.” He adds: “If they find themselves in a place where they’re not able to address the debt as aggressively as they’d like to, a DCP is certainly an option to think seriously about.”

People from all backgrounds with various income levels and professions can benefit from talking to a certified non-profit credit counsellor. A counsellor will assess your financial situation and determine what options are available to you. Rest assured, they will keep everything confidential and provide a judgment-free zone. If you’re looking for debt advice and prefer not to speak to a person, now you can also do a full debt assessment using Credit Canada’s AI debt management agent, Mariposa.

Benefits of a non-profit credit counselling agency

There are many benefits that come with a non-profit credit counselling agency. They provide debt management services, including one-to-one counselling, debt consolidation programs, and educational seminars and workshops.

Be sure to do your research and find an agency that has a good reputation based on client testimonials or online reviews. Check for industry qualifications, such as being an accredited member of Credit Counselling Canada, and avoid any agency that isn’t up front about its fees.

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How much do credit counselling agencies charge?

There are no upfront fees for non-profit credit counselling—they provide counselling and education services free of charge. For-profit services typically charge a fee.

Both types of credit counselling agencies may charge a fee for programs like a DCP (also referred to as a debt management plan).

Advantages of a debt consolidation program

There are many benefits to using a debt consolidation program. These may include:

Working with a certified credit counsellor who negotiates with lenders on your behalf
Combining multiple debts into one and reducing the interest rate on your debts
Having a simplified payment plan and knowing your completion date
Making your payments affordable and automated
Stopping creditors from making debt collection calls
Avoiding a consumer proposal or filing for bankruptcy
Debt management advice and resources
Financial wellness for long-term success

Disadvantages of debt consolidation programs

Enrolling in a DCP has a few drawbacks you should be aware of. Lenders use codes on your credit report to rate the credit products based on the payment history, with R1 being the best and R9 being the worst. An R9 indicates that the account has been written off and sent to collections. Your payment history is shared with Canada’s two credit bureaus, Equifax and Transunion, and appears on your credit report.

Paying your debts off through a DCP gives you a rating of R7, which will last until you complete the program. Typically, individuals starting a DCP might already have a hampered credit score. As long as you successfully complete your program, your credit score will improve over time.

Another restriction is that you’ll have to stop using unsecured credit, such as a traditional credit card. Usually, this isn’t an issue, since most individuals enrolling in a DCP have already reached their credit card limit. You should still be able to access a secured credit card. As a part of the application process, you’ll be asked to put a security deposit as collateral.

Receive professional advice

No matter your debt situation, you have options to get started on the right path. You can always reach out to a non-profit credit counselling agency that can provide free advice and come up with a debt solution plan that is customized to your needs.

This article was written by Himank Bhatia, a credit counsellor and financial coach with Credit Canada, Canada’s first and longest-standing credit counselling agency. For more than 50 years, Credit Canada has been helping Canadians get out of debt and back into life through financial education and debt resolution. As a national, non-profit organization, Credit Canada has helped thousands become debt-free and achieve financial wellness. If you are struggling with debt, you can contact Credit Canada for free credit counselling services.

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