Debt Consolidation Loans
Turn several bills into one manageable payment. Here's how debt consolidation loans actually work, and how to tell if the strategy fits your situation.
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What a Debt Consolidation Loan Is
It's a personal loan used to pay off multiple existing debts — credit cards, store cards, medical bills, other loans — and replace them with one monthly payment, ideally at a better rate than what you're already paying.
The appeal is simplicity: instead of five payments at five rates on five different dates, you're down to one of each. That alone makes budgeting easier, and a lower blended rate can cut your total interest on top of it.
It's one of the most common reasons Canadians take out a personal loan in the first place. With typical credit card rates sitting around 19.99%-22.99%, a personal loan at 12%-25% APR can add up to real savings.
How It Actually Plays Out
The mechanics are simple once you see the sequence:
- 1List every debt you're carrying — balance, rate, and monthly payment
- 2Total it up and work out your blended average rate
- 3Apply for a personal loan covering that amount, or close to it
- 4Once approved, use the funds to clear everything immediately
- 5Make one payment on the new loan going forward
- 6Don't let the accounts you just paid off start filling back up
The Part People Get Wrong
The most common way this backfires is straightforward: pay off the cards, then charge them right back up. That leaves you with the new loan payment AND fresh card balances — worse off than before you started.
When It's Actually Worth Doing
Consolidation isn't automatically the right call — it depends on the specifics.
It makes sense when the new rate genuinely beats your current blended rate — going from 22% on cards to 15% on a personal loan is real savings.
It also helps just from a simplicity standpoint — even with modest rate savings, collapsing several due dates into one lowers your odds of missing a payment.
It does NOT make sense if you stretch the term out so far that total interest ends up higher despite the lower rate, or if you keep using the cards you just paid off.
| Scenario | Example | Consolidation Recommended? |
|---|---|---|
| High-rate credit card debt | 3 cards averaging 22% APR, consolidation loan at 15% | Yes—saves on interest |
| Mix of low and high rate debts | Car loan at 5%, credit cards at 20% | Consolidate only the high-rate debts |
| Small total debt | Less than $500 total across all debts | Probably not worth the effort |
| Spending habits unchanged | History of running up balances after paying off | No—address spending first |
Compare offers from 50+ Canadian lenders with no impact to your credit score before deciding.
What These Loans Cost
Pricing follows the same logic as any personal loan — your rate comes down to credit score, income, and overall profile.
In Canada, consolidation loans typically run 8% to 35% APR. For the math to actually work in your favour, the new rate needs to be meaningfully below your current blended rate — a gap of 5 points or more is usually the threshold where it's clearly worthwhile.
Where People Go Wrong
A few mistakes show up over and over:
- Running the credit cards back up after consolidating — the single most common mistake
- Stretching the term so long that total interest ends up higher than before
- Origination fees eating into whatever you saved on rate
- Borrowing more than you actually owed
- Consolidating without ever addressing the spending that created the debt
Other Ways to Approach It
A personal loan isn't the only path to getting multiple debts under control.
- A 0% intro-APR balance transfer card
- A non-profit credit counsellor's debt management plan
- A line of credit from your bank, potentially at a better rate
- A consumer proposal, Canada's formal debt-settlement option
- Negotiating directly with your creditors
- A HELOC, if you own property
Frequently Asked Questions
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