A debt consolidation loan is a personal loan used to pay off other debts, usually credit cards, store cards or lines of credit. Instead of several balances with different rates and due dates, you have one fixed monthly payment and a set end date. Done well, it lowers your interest costs. Done badly, it costs more and leaves you with both the loan and new card debt.
A loan saves money when
- Its rate is clearly lower than the average rate on your current debts
- Its term isn't so long that extra years of interest cancel the lower rate
- Its fees are small, and you don't run the cleared cards back up
How it works
- You apply with a bank, credit union or online lender for a loan covering your debts.
- If approved, the lender either pays your creditors directly or deposits the money for you to pay them.
- You repay the loan in equal monthly instalments, typically over two to five years.
What rates to expect
Rates depend heavily on your credit score, income and existing debt. Borrowers with strong credit may get rates well below typical credit card rates of around 20%. Borrowers with weaker credit are often offered much higher rates from alternative lenders. Since January 1, 2025, Canada's criminal interest rate caps most consumer loans at a 35% annual percentage rate (APR), down from roughly 48% before.
Compare APR, not just the advertised rate. The APR includes most fees. A loan with a low rate but a large origination or administration fee can cost more than it appears.
How to qualify
- Credit score: mainstream lenders generally prefer scores in the mid-600s or higher
- Debt-to-income: your total monthly debt payments compared with your income
- Stable income: employment history and proof of income
- Collateral or co-signer: can help if your credit is limited
Checking your own credit report before applying helps you avoid surprises. Rate-shopping with several lenders in a short window is generally better than spreading applications out.
An example
Say you owe $17,000: $8,000 on a card at 20.99%, $3,000 on a store card at 29.99% and $6,000 on a line of credit at 11.5%. A four-year loan at 11.99% would cost roughly $448 a month and about $4,500 in total interest. Whether that beats your current plan depends on what you're paying now. Plug your own numbers into the calculator.
Pitfalls
- Re-using the cards. The biggest risk. Consider closing cleared cards or cutting their limits.
- Stretching the term. A lower monthly payment over seven years can cost more than your current debts.
- Add-on insurance. Lenders may offer loan insurance; it's optional, and it raises the cost.
- Consolidating low-rate debt. Folding a 6% car loan into an 18% personal loan makes no sense.
- Debt settlement companies posing as lenders. Check exactly what you're signing.
Effect on your credit
Applying triggers a hard inquiry and the new account lowers your average account age, so your score may dip briefly. As card balances drop and you pay the loan on time, your utilization falls and your score usually recovers and improves.
If you're turned down
If you can't qualify at a rate that helps, a non-profit debt management plan can reduce interest without a loan, and a consumer proposal may be an option if repaying in full isn't realistic.
Frequently asked questions
What credit score do I need for a debt consolidation loan in Canada?
Mainstream lenders generally look for fair to good credit, often in the mid-600s or higher. Lower scores may qualify with alternative lenders at higher rates.
Is a debt consolidation loan the same as a consumer proposal?
No. A loan is new borrowing that you repay in full. A consumer proposal is a legal arrangement, filed by a Licensed Insolvency Trustee, to repay creditors less than you owe.
What is the maximum interest a lender can charge in Canada?
Since January 1, 2025, the criminal interest rate is 35% APR for most loans. Some products, such as payday loans and small pawn loans, are covered by separate rules.
Sources
- Financial Consumer Agency of Canada, Personal loans
- Justice Laws Website, Criminal Code, section 347 (criminal interest rate)