Debt consolidation in Canada: loans, lines of credit and balance transfers compared

What debt consolidation does

The Financial Consumer Agency of Canada (FCAC) defines debt consolidation as combining multiple debts into one, so you make 1 payment instead of many. The goal is usually a lower interest rate, a single due date, or both.

It isn’t debt relief. You still owe the full amount. FCAC is blunt about the main risk: if you keep the spending habits that caused the debt, consolidation will likely leave you owing more.

Your options, side by side

The first four options are borrowing products from a bank or lender. The last two are for people who can’t repay on their current terms.

Borrowing to consolidate

A debt consolidation loan is the most direct route. FCAC notes it has regular payments, a fixed or variable rate and a set repayment period, so you know the end date. Personal loans and home equity loans can do the same job.

A line of credit is more flexible, which is also the problem. FCAC says payments may cover only the interest, and if you keep borrowing from it, getting out of debt may be difficult. Before you get one, make sure you have the discipline to pay it back.

A HELOC usually carries a lower rate because your home secures it. FCAC says you can borrow up to 65% of your home’s value this way, but you must pass a stress test at a bank, and you could lose your home if you don’t repay. Our Lab notes on a line of credit and a HELOC go deeper on both.

A balance transfer moves card debt to a new card at a low or 0% rate, usually for 6 to 18 months, for a fee that’s a percentage of the amount moved. It works well for card debt you can clear before the promo ends. Our balance transfer Lab note covers the costs and current offers.

When you can’t qualify for a loan

If your debts have outgrown your income, the OSB points to two structured options.

• A debt management plan (DMP). A credit counsellor proposes one affordable monthly payment to your creditors. FCAC says you usually repay 100% of the debt, but you may not have to keep paying interest. The OSB says a DMP lasts 1 to 5 years, and any credit card in it must be closed.
• A consumer proposal. Only a Licensed Insolvency Trustee can file one. You offer to repay part of what you owe, or take longer, over up to 5 years. Fees are regulated under the Bankruptcy and Insolvency Act, and you must attend two financial counselling sessions.

Credit counselling is offered by both not-for-profit and for-profit companies, and fees vary. FCAC says no reputable agency charges for the first meeting, and simply talking to one won’t affect your credit score. Many trustees also offer a free first consultation.

How consolidation affects your credit score

Consolidating can help your credit score. FCAC says it may improve your score if you make on-time payments and reduce the number of high-balance accounts. Paying off cards also lowers your credit utilization, the share of your limits you’re using.

It can also hurt in the short term. Applying for loans with several lenders in a short time may lower your score, so compare rates first and apply selectively. The structured options leave a longer mark: the OSB says Equifax removes a consumer proposal 3 years after you complete it, and TransUnion removes it 3 years after completion or 6 years after signing, whichever is sooner. A first bankruptcy stays for 6 or 7 years after discharge.

Check your credit report before and after so you can confirm old accounts show as paid.

Worked example: $15,000 in card debt

Say you owe $15,000 across credit cards at 20.99%. Interest in the first month is about $262.38. Paying $450 a month, you’d need 51 months and pay about $7,703 in interest.

Both loans cost less than staying put. But the 5-year loan, with its lower payment, costs about $1,700 more in interest than the 3-year one. That’s FCAC’s point about longer repayment periods. Choose the shortest term you can afford, and model it with the debt payoff calculator.