Debt consolidation loans, and the arithmetic that decides whether they help

What a debt consolidation loan is

A debt consolidation loan is a single unsecured instalment loan used to pay off several debts at once, so that one payment replaces the payments you were making across separate accounts. You borrow an amount that covers the balances you want to clear, the lender advances it or pays those creditors directly, and you repay the new loan on a fixed schedule.

Consolidation does not shrink what you owe. The balances you clear are the same balances you are carrying afterward; they have moved to one creditor. What changes is the structure and the cost of carrying the debt: one payment, one due date, one rate, and a defined end date. Whether that is cheaper than what you pay now depends on the rate you are offered, the length of the term, and the fees added to the loan.

The consolidation loan vs line of credit question comes up early for most borrowers, and the practical difference is the shape of the credit. A consolidation loan is closed-end: a set amount, a fixed payment, a final date. A line of credit is revolving: you can draw and repay as you go, payments are often calculated on the balance, and there is no scheduled end. If your main problem is that minimum payments never seem to reduce the balance, a closed-end loan imposes the discipline. If your main problem is a short-term cash flow squeeze, a closed-end loan over a long term may cost more than you expect.

One mechanical point decides a lot. When the old accounts are paid off, they usually stay open at a zero balance. If you use them again, you are servicing the consolidation loan and the new balances at the same time.

Who it suits

• You hold several unsecured balances, and the combined minimum payments are crowding out the rest of your budget.
• Your income is steady and can be documented with pay stubs, notices of assessment or bank statements.
• You are current, or close to current, on the debts you want to combine, and no account has recently been placed with a collections agency.
• The problem is the structure of your debt rather than the size of your income: you can cover one fixed payment, but not several moving ones.
• You want an end date. A set term with a final payment suits you better than an open-ended revolving balance.
• You have stopped using the accounts you intend to clear, or you have a concrete plan for keeping them clear.

What a lender checks

Lending in Canada is licensed provincially, so the regulator, the disclosure rules and the complaint route differ by province and territory, and assessment criteria differ by lender. Even so, the same four inputs are weighed in most applications.

Income comes first: how much comes in, how predictable it is, and how it is documented. Existing payments come next. A lender totals your housing costs and all debt payments, including the proposed new loan, and compares that total to gross income. Federally regulated mortgage lenders generally work to a total debt service ratio ceiling of about 44%, and qualify an uninsured mortgage at the greater of the contract rate plus two percentage points and 5.25% under OSFI Guideline B-20. Insured mortgages and provincially regulated lenders are not all subject to B-20, so the test applied to any secured option you are offered may be different.

Your credit file is the third input. Two national bureaus, Equifax Canada and TransUnion Canada, hold a file on you, and a free copy of your credit report is available from each. A lender reads the file for payment history, how long accounts have been open, how much of your available revolving credit you are using, and how many recent applications appear. Security is the fourth. An unsecured consolidation loan relies on your income and your file. Where the amounts are larger or the file is thinner, a lender may instead propose something secured. A home equity line of credit for debt consolidation is secured against your property, and at federally regulated lenders it is generally limited to 65% of appraised property value, with total secured lending on the property usually capped at 80%. Secured borrowing can carry a different cost, but the consequence of default is also different.

loanmoose.ca is not a lender. It does not make loans, set rates or make credit decisions. It matches borrowers with lenders and lets you compare. Nothing on this page is an approval, an offer, or a prediction of what you will be offered.

What it costs to carry

Four components make up the cost of a consolidation loan, and only one of them appears in the headline figure.

Interest is charged on the outstanding balance and is the number most often advertised. It is set by your credit file, your income, the term, and whether the loan is secured or unsecured. A longer term usually lowers the payment and raises the total interest paid. This page does not quote a rate, because the rate you would be offered depends on your file and on the lender.

Fees are charged alongside interest: an origination or administration fee, a brokerage fee in some arrangements, and any prepayment penalty if you pay the loan off early. Fees are sometimes deducted from the advance and sometimes added to the balance. Both raise the effective cost, so ask which applies.

Insurance is usually optional creditor insurance sold with the loan. It is priced separately, and declining it should not affect your eligibility for the loan itself. Read what it covers and what it excludes before you decide.

The gap between the headline rate and the total cost of borrowing is the number that matters. Take the total of all payments you will make over the term, subtract the amount actually advanced to you, and you have the real cost. A loan with a modest rate over a long term can cost more in dollars than an expensive loan you clear quickly. The line of credit vs loan for debt consolidation comparison usually turns on exactly this: a revolving line of credit charges interest on the balance you actually carry, while a closed-end loan charges interest on the full amount for the whole term.

Two legal limits sit in the background. The Criminal Code sets the criminal rate of interest at 35% per year. Where a province operates a licensed payday lending regime, the federal Payday Lending Regulations cap the cost of borrowing at $14 per $100 advanced; some provinces set a lower cap, and the lower cap applies. Quebec does not license payday lending, which effectively prohibits the model there. A payday loan is generally up to $1,500 for a term of 62 days or less. A cap is a ceiling, not a benchmark for a good deal.

How it compares with the alternatives

Option	When it fits	What to watch
Unsecured debt consolidation loan	Balances are spread across several accounts, income is steady, and a fixed payment with an end date suits you.	The term. A longer term lowers the monthly payment and raises total interest. Fees added to the balance instead of paid upfront.
Unsecured line of credit	You expect to repay a lump sum relatively quickly, or you want to pay interest only on the balance you actually carry.	The rate is typically variable. Minimum payments may be interest-only, so the balance can sit unchanged for a long time, and there is no scheduled end date.
Home equity line of credit	You own a property with equity, want secured borrowing, and your income supports the qualification test.	A home equity line of credit for debt consolidation is secured against your home. At federally regulated lenders it is generally limited to 65% of appraised value, with total secured lending usually capped at 80%. Rates are typically variable.
Balance transfer or a new card with a promotional rate	The balance is small enough that you can clear it inside the promotional period.	What the rate becomes when the period ends, and the transfer fee. The promotional period ends on a set date, not when you are ready.
Consumer proposal	Debts are unmanageable relative to income and a legal settlement with creditors is needed.	Only a licensed insolvency trustee can administer one. It stays on your credit report for 3 years after completion, or 6 years from filing, whichever comes first.
Bankruptcy	Debts cannot be managed and the other options have been exhausted.	Only a licensed insolvency trustee can administer it. A first bankruptcy stays on your credit report for 6 years after discharge.

Before you sign

1. List every debt with its exact balance, rate and minimum payment, and request current payoff figures in writing. A payoff amount changes as interest accrues, so a figure quoted last week may not clear the account today.
2. Ask for the total cost of borrowing rather than the rate: total payments over the term minus the amount advanced to you. If it will not be put in writing, that is your answer.
3. Compare the total interest over the new term against what you would pay by continuing your current payments. A lower monthly payment is not the same thing as a lower cost.
4. Confirm what is secured and what is not. If any asset, and your home in particular, is pledged as security, understand the consequence of default before you sign.
5. Check the lender's licensing and the complaint route, and read the prepayment and insurance terms. Complaints about federally regulated financial institutions go to the Financial Consumer Agency of Canada, while most other lenders are licensed and supervised provincially. Keep a copy of everything you sign.