Debt Consolidation

Monday, July 21, 2014

Debt ConsolidationDebt consolidation is a process whereby a financial institution lends you a lump sum to settle your outstanding debts. You consequently have only the one loan with that financial institution which you then re-pay.

  • Debt consolidation is generally a useful option for families who owe several institutions a lot of money. A reputable institution charges lower interest on a debt consolidation loan than the interest you pay on your store and credit cards. You will thus manage to pay off your debt more quickly. Royal Bank of Canada, Canadian Imperial Bank of Commerce, and several other financial institutions have calculators on their websites to help you determine whether debt consolidation will save you money.

  • Contact as many financial institutions as possible before you sign an agreement. Some offer loans at lower interest rates than others. Some charge a lower initial fee to register the debt consolidation loan. Some institutions include all your current loans, while others may exclude some of your debt from the consolidation process. Pick the best option for your family. The Office of Consumer Affairs recommends that you begin with mainstream financial institutions, since they tend to charge lower interest on their loans. You can expect interest of between seven and 12 per cent.

  • To qualify for a debt consolidation loan, you must have a respectable credit score and some expensive possessions to list as security in case you fail to make your payments.

  • If you fail to get a debt consolidation loan approved for a monthly payment you can afford, you can ask your bank for a home equity loan" (also called a second mortgage). If your house is worth $300,000 and you have already paid off $100,000 of it, the bank can lend you the $100,000 with your house as security. This is an especially good strategy at today's lower mortgage interest rates, but you must plan for a scenario where the interest rate increases and your loan re-payments increase. Moreover, the fee for registering a second mortgage tends to be high. 

  • You can also ask your bank for a line of credit, which effectively turns your debit card into a credit card with a pre-determined limit a minimum monthly payments. If your bank does not add a large fee of its own, a line of credit is typically based on the prime interest rate set by the Bank of Canada. At present this entails lower interest rates, but it may increase in the future.


Avoid for-profit debt management counsellors. They normally charge a large fee upfront.