What Is Debt Consolidation and How Does It Work in Canada?

What is debt consolidation?

Debt consolidation is pretty much what it sounds like: It’s the practice of consolidating several debts into one debt. It’s typically done by taking out a loan or line of credit to pay off a bunch of other smaller loans. The idea is to find a loan that offers better repayment terms, such as a lower interest rate, so you can free yourself from debt faster, with no need to juggle several monthly payments.

Usually, you would use this strategy for your unsecured debts (that is, the kind not secured by collateral), especially any balances that are subject to high interest rates. For this reason, many people opt to consolidate credit card debt.

In addition to credit card debt, you can also consolidate, unsecured personal loans and similar financial liabilities. Debt consolidation isn’t, however, a strategy you’d use for secured debts, such as your mortgage, which is secured by your home and cannot be combined with other debts.

Can I consolidate credit card debt into one loan?

Yes, you can. In fact, dealing with credit card balances is a very common motivation for people considering debt consolidation. Why might this be a good idea? Let’s say you have credit card debt spread across several cards – perhaps a standard one charging an annual interest rate (AIR) of 19.99%. If you can pay off those balances with a loan with an annual interest rate of 8% for example, that’s just a fraction of that so the potential upside is clear.

With debt consolidation, the key is to be approved for a loan that offers better terms than what you already have. In addition to a lower interest rate, you may be able to get a loan that accepts a lower, fixed monthly payment. This can help you clear off what you owe more quickly. Plus, it’s easier to take care of a single payment every month instead of staying on top of a bunch of them.

Will debt counselling help?

Debt counselling, or credit counselling, is a process designed to assist people who feel burdened or overwhelmed by credit card debt or other bills. You can access debt counselling through not-for-profit and for-profit organizations specializing in this type of financial help. Make sure to do your research to find a reputable organization in good standing.

As the name implies, debt or credit counselling involves an educational component, and if you’ve always been fuzzy on the fundamentals of proper budgeting and smart spending, learning them could be game-changing.

Although credit counselling can be beneficial, it’s not a fix-all or ideal for everybody. One factor to consider is how much money you owe: If it’s a huge, insurmountable amount, alternatives such as debt settlement (which involves making arrangements with creditors to forgive part of your debt if you can pay an agreed-upon lump sum) might be more suitable. It’s also important to know that credit counselling can have a negative impact on your credit report.

How do I consolidate my debt?

First, know what you need to borrow – make a list of all the debt you want to consolidate. Add up your financial liabilities, especially anything incurring high interest, such as any credit card debt you’re carrying from month to month, and any overdue bills. Also, figure out how much money per month you will be able to put toward repaying your new loan, so you have a sense of your preferred term (for instance, 12, 24 or 36 months).

With those details in hand, you can begin researching personal or debt consolidation loans that may fit your needs. The interest rates available to you will vary, depending on your credit rating. In addition to potential loans at your bank, you may have options available to you through your credit card provider. For example, American Express^® Personal Loans are unsecured loans offered only to select pre-approved American Express Cardmembers, and they can be used for a variety of purposes, including as a way to consolidate credit card debt. Try our Personal Loan Calculator to see what your estimated monthly payments would look like with an American Express Personal Loan.¹

After you figure out the loan option that works best for your debt consolidation, you can apply for it. Expect to provide financial details, such as your annual income. (Note that you may not qualify for a debt consolidation loan, depending on factors like your creditworthiness) Don’t forget to read the fine print, so you understand the loan terms and conditions.

Once you’re approved, you can usually expect the loan funds to be deposited into your chosen bank account within a predetermined period. After that, pay off your credit card debt and any other bills you planned to clear off – and enjoy a simpler way of managing your money.