Debt consolidation in Canada combines multiple debts into one payment, ideally at a lower interest rate. With average Canadian household debt at over $21,000 (excluding mortgages), it’s one of the most common debt strategies. Here’s how it works.
Debt Consolidation Options in Canada
| Option | Typical Rate | Best For | Credit Impact |
|---|---|---|---|
| Consolidation loan | 8–15% | Good credit, $5K–$50K debt | Neutral/positive |
| Balance transfer card | 0–3% (promo) | Under $10K, good credit | Neutral |
| Home equity loan/HELOC | 5–8% | Homeowners, large debt | Neutral |
| Debt management program (DMP) | 0% (negotiated) | Struggling to pay, any credit | R7 notation |
| Consumer proposal | Reduced principal | $5K–$250K, can’t repay in full | R7 for 3 years |
| Informal debt settlement | Negotiated | Small amounts, few creditors | Negative |
How a Consolidation Loan Works
- Apply through a bank, credit union, or online lender
- Get approved for a single loan covering your total debt
- Use the loan to pay off all existing debts
- Make one monthly payment at a lower rate
Example: $25,000 in Debt
| Before (Multiple Debts) | After (Consolidation Loan) |
|---|---|
| Credit card 1: $10,000 at 19.99% | Single loan: $25,000 at 10% |
| Credit card 2: $8,000 at 22.99% | Monthly payment: $531 |
| Line of credit: $7,000 at 12% | Payoff time: 5 years |
| Monthly total: $750 | Interest saved: $8,200 |
| Payoff time: 7+ years |
Where to Get a Consolidation Loan
| Lender Type | Rates | Min. Credit Score |
|---|---|---|
| Big 5 banks | 7–12% | 680+ |
| Credit unions | 6–11% | 650+ |
| Online lenders (e.g., Borrowell) | 8–18% | 600+ |
| Alternative lenders | 15–35% | 500+ |
When Consolidation Won’t Work
- Too much debt — if payments exceed 40% of income, a consumer proposal may be better
- Spending habits unchanged — consolidation fails if you keep adding debt
- Very low credit score — you may not qualify for a lower rate
- Secured debt — mortgages and car loans can’t typically be consolidated this way
Consumer Proposal vs. Consolidation Loan
| Factor | Consolidation Loan | Consumer Proposal |
|---|---|---|
| Repay amount | 100% + interest | 20–50% of total |
| Interest rate | 8–15% | 0% |
| Credit impact | Minimal | R7 for 3 years after completion |
| Monthly payment | Higher | Lower |
| Best for | Good credit, manageable debt | Overwhelmed, can’t repay in full |
Bottom Line
Debt consolidation in Canada works best when you have good credit (650+), steady income, and $5K–$50K in unsecured debt. The goal is a lower interest rate and simplified payments. If you can’t qualify for a lower rate, or if your debt exceeds 40% of income, explore a consumer proposal or credit counselling instead.
See our Canadian debt calculator to check your debt ratios.
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