More Resources
Table of Contents
Are you facing a decision about using personal loans to pay off debt? This is a decision that should be considered carefully, regardless of your financial situation. There are situations where a personal loan can prevent a more costly debt emergency.
In this short guide, you’ll learn how personal loans can be used to consolidate your debt. You’ll discover the benefits of using these loans, explore scenarios where they’re useful, and learn more about the alternatives.
Debt consolidation loans are a common type of personal loan available in Canada. As the name suggests, these loans are intended to “consolidate” multiple sources of debt, so the borrower is responsible for managing only one payment and interest rate.
Start by finding a Canadian lender that offers consolidation loans, then contact them for a consultation. They’ll want to know what types of loans you’ll be consolidating, and what amount you owe for each of them. Make sure you bring in up-to-date statements covering each one.
Old debts targeted for consolidation often include:
Often, you can negotiate a lower combined monthly payment than you pay now. This is particularly true if you are paying fees or penalty interest rates on your old debt.
You will need to be approved for a consolidated loan. Your eligibility will depend on your credit and what you are willing and able to pay. Interest rates, total loan amounts, and approval vary by lender.
You may need to speak with several lenders to find one that offers a consolidated loan with the terms you need. It’s worth the effort because there are benefits to using personal loans to pay off debts.
A personal loan that consolidates some of your existing debt can help restore order to a chaotic family budget.
If you have many high-interest debts, you already know how stressful it is to manage due dates that are scattered throughout the month. Consolidation can leave you with just one due date for the month. That’s just one benefit, though. There are several more you should consider.
Consolidation simplifies your monthly payments by turning multiple balances, interest rates, and due dates into a single, organized bill.
When you have a lot of different debts, you’re more likely to have to deal with extra expenses like late fees and non-payment penalties. Once you’ve consolidated your debts, you’ll only have to manage one payment each month, and you’ll have space to prepare and budget for it properly.
Personal loans can have higher interest rates than other common types of loans. However, the rate you qualify for may be better than the rate on the debt you currently hold. If you can qualify for a lower interest rate overall, you’ll be able to save money over the long term and resolve your debt more quickly.
If you have many different debts, it can be stressful to keep up with all of the figures that matter, particularly the date by which you can look forward to being done with all of it. Consolidating your debt means you only need to consider one set of terms. This will help you stay on top of your debt situation and avoid surprises.
It will take you far less time to manage your loan every month if you’re only dealing with one. This can give you some of your time back and reduce the time you spend trying to remember whether you’ve paid everything on time.
How valuable these benefits are to you will depend on your situation. Personal loans are not the most low-interest option, but they may be a lower-interest solution in a variety of situations.
Personal loans can save you money over the long term when they can help you shorten your loan term or lower your interest rate. You should always examine the terms of any new loan agreement closely to confirm the rate remains lower until the end of the loan term.
If you’re already paying high interest rates on your existing debt, any loan with a lower interest rate on the same balance can help you pay less over time. For example, credit cards often have much higher interest rates than personal loans for the same balances.
One or more of your debts may have an interest rate that exceeds the rate on a consolidation loan you could qualify for. You won't know until you schedule a consultation.
Some types of debts are on a strict deadline, and you may be responsible for a larger balance or punitive fees if you can’t resolve them before a deadline. When you’re faced with this kind of debt, using a personal loan could help you save money if
You may also be losing money managing too many loans. When you have a lot of unconsolidated debt from different sources, you’re more likely to miss things and to end up paying fees and penalties for not meeting your obligations. If penalties are becoming a regular part of your expenses, consolidation could help you avoid this problem in the future.
There may be other situations where a consolidated personal loan coild save you money, but it’s not always the right choice. Before you take on any new debt, consider alternatives to personal loans that may be a better fit for your personal situation.
You have many options if you’d rather not consolidate with a personal loan. If you have any assets, such as a home or a vehicle, you may be able to qualify for lower-interest loans by using your collateral. Not all financial institutions offer this option, and it may require a good credit score.
If some of the debt you’re consolidating is credit card debt, you may be eligible for interest-free periods if you do a credit card balance transfer. These offers are not as common as they once were, and they may require you to have excellent creditworthiness to qualify.
If your debt-to-income ratio is too high, you may not qualify for loans with lower interest rates at all. There are some public resources available if you need immediate help. You can request help with personal debts through government-sponsored counselors, and you may qualify for debt relief.
While consolidated personal loans can be a practical option in some situations, taking on any new debt is not the solution for everyone. If you are experiencing problems with out-of-control debt, you should talk to someone who can provide you with assistance.
See the Government of Canada’s official guidance on getting help from a credit counsellor. Here, you can get advice about finding a credit counselling agency and learn more about the debt management plans that exist if your debt has become unmanageable.
You may qualify for debt relief under special circumstances. These circumstances are exceptions that apply to certain types of debt and may allow you to eliminate your interest or reduce the amount you owe. Learn more about special circumstances and the debt they apply to here.
These options apply only to certain types of debt, such as CRA taxes, payroll taxes, Employment and Social Development debts, and customs duties. Use the linked resources to learn more about these options and whether you may qualify.
Now, you understand why personal loans are sometimes used to pay off old debts. When these personal loans can consolidate old debts under more favorable terms, they can deliver lower monthly bills while being easier to manage.
If you’re interested in consolidating your old debts under a single personal loan with a lower interest rate, talk to us about the many available options. Apply now and we’ll help you understand what’s possible based on your credit score and other factors.