Debt consolidation means combining several debts, usually credit cards and other high-interest balances, into a single payment, ideally at a lower interest rate. In Canada there are six main ways to do it. The first three are borrowing products that need decent credit. The last three are debt relief programs for people who can no longer keep up.
The options at a glance
| Option | Best for | Credit needed | Credit report impact |
|---|---|---|---|
| Consolidation loan | Manageable debt, steady income | Fair to good | Minor: new account and inquiry |
| Balance transfer card | Smaller balances you can clear within the promo period | Good | Minor |
| Home equity (HELOC or refinance) | Homeowners with equity and stable income | Good | Minor, but your home is security |
| Debt management plan | Unsecured debt you can repay in full with lower interest | Any | Noted until 2 years after completion |
| Consumer proposal | Debt you can't repay in full, up to $250,000 | Any | Noted, typically up to 3 to 6 years |
| Bankruptcy | No realistic way to repay | Any | Most severe: 6 to 7 years after discharge for a first bankruptcy |
1. Debt consolidation loan
A bank, credit union or online lender gives you a fixed-rate personal loan to pay off your other debts, which you repay in equal monthly instalments over two to five years. It works when the loan rate is meaningfully lower than what you're paying now, and when you stop using the cards you paid off. Read the full guide.
2. Balance transfer credit card
Some cards offer a low promotional rate on transferred balances for a set period, often 6 to 12 months, usually with a transfer fee of a few percent. It can be the cheapest option if you can pay the balance off before the promotion ends. If you can't, the remaining balance typically reverts to the card's regular rate, often around 20% or more.
3. Home equity
Homeowners can borrow against their equity through a home equity line of credit (HELOC) or by refinancing their mortgage. Rates are usually much lower than unsecured debt. The trade-off is serious: you're turning unsecured debt into debt secured by your home, and stretching it over many years can increase the total interest you pay.
Consolidation only works if spending changes. The most common failure is paying off cards with a loan, then running the cards up again. Many counsellors suggest closing or lowering the limits on cards you've cleared.
4. Debt management plan through credit counselling
A non-profit credit counselling agency negotiates with your creditors to reduce or eliminate interest, and you make one monthly payment to the agency, which pays your creditors. You repay the full amount owed, usually within five years. Read the full guide.
5. Consumer proposal
A legally binding agreement, filed by a Licensed Insolvency Trustee, in which your unsecured creditors agree to accept less than the full amount, paid over up to five years. Interest stops and collection calls end once it's filed. It's available if your unsecured debts, excluding the mortgage on your home, total $250,000 or less. Read the full guide.
6. Bankruptcy
A legal process, also handled by a Licensed Insolvency Trustee, that eliminates most unsecured debts. Some assets may have to be surrendered, depending on provincial exemptions, and you may make monthly payments based on your income. It's the most serious option, and the hardest on your credit, so it's usually considered only after a proposal has been ruled out.
How to choose
- Can you afford your current minimum payments? If yes, a loan, balance transfer or home equity product may simply lower your costs.
- Can you repay everything if interest is reduced? If yes, a debt management plan avoids borrowing more.
- Is repaying in full unrealistic? Talk to a Licensed Insolvency Trustee about a consumer proposal before considering bankruptcy.
Use the calculator to test whether a consolidation loan would actually save you money.
What to avoid
- Companies that charge large upfront fees to "settle" your debts. Only Licensed Insolvency Trustees can file consumer proposals and bankruptcies.
- Loans with rates above what you're paying now, or long terms that raise the total cost
- Payday loans, which can cost hundreds of percent a year
Frequently asked questions
Is debt consolidation a good idea?
It can be, if it lowers your interest rate and you avoid building new debt. It's a poor idea if the new rate or term makes the total cost higher, or if it frees up cards that you then use again.
Can I consolidate debt with bad credit?
Mainstream loans can be hard to get with bad credit. Debt management plans and consumer proposals don't require good credit.
Who regulates debt help in Canada?
Licensed Insolvency Trustees are licensed and supervised by the Office of the Superintendent of Bankruptcy. Credit counselling and lending are regulated provincially, and banks federally.
Sources
- Financial Consumer Agency of Canada, Getting help from a credit counsellor
- Office of the Superintendent of Bankruptcy, Debt and insolvency information