A debt consolidation loan is one of the most straightforward ways to simplify your debt payments and potentially reduce your interest costs. The idea is simple: you borrow a single lump sum, use it to pay off multiple existing debts, and then repay the new loan with one monthly payment — ideally at a lower interest rate than you were paying before.
But whether this strategy actually saves you money depends heavily on the rate you can qualify for, how much you owe, and whether you can stay out of debt after consolidating.
The benefit is realized only when the new loan's interest rate is meaningfully lower than the rates on the debts being consolidated. Consolidating a 19.99% credit card balance into a 10% personal loan saves real money. Consolidating into another 19.99% product does nothing except simplify your payments.
The Big Six banks and most credit unions offer personal loans that can be used for debt consolidation. Rates depend on your credit score, income, and relationship with the institution. Credit unions in particular often offer more competitive rates for members, especially those with lower credit scores.
Several Canadian fintech lenders offer personal loans for debt consolidation, often with faster approval processes. Rates range widely — some target prime borrowers with rates below 10%, while others target higher-risk borrowers with rates of 20–30%+. Always calculate the total cost of borrowing before accepting an offer from an online lender.
If you own a home with equity, you may be able to use a HELOC or second mortgage to consolidate debt at much lower rates. Rates are typically prime plus a small spread. The risk is converting unsecured debt to secured debt — if you default, you risk your home.
Rates vary significantly by lender and borrower profile:
If you can only qualify for a rate equal to or higher than your existing debts, a consolidation loan provides little benefit. In that case, consider other options like a Debt Management Plan or a consumer proposal.
Lenders assess:
If you have been missing payments or carrying very high balances, your credit score may already be damaged enough to make qualifying at a useful rate difficult.
The most common pitfall of debt consolidation loans is what happens to your credit cards after you pay them off with the loan. Many people leave the cards open (or even max them out again) and end up with both the consolidation loan and new credit card debt — doubling the total owed.
If your total debt is very high relative to your income, or your credit is damaged to the point where you cannot qualify for a meaningful rate reduction, a consolidation loan may not be a viable solution. In those cases, consider:
A free consultation with a Licensed Insolvency Trustee will help you understand which path makes most financial sense for your specific situation.
KOHO offers free banking with no monthly fees and no credit check required. Available to all Canadians regardless of credit history. Use code 45ET55JSYA for a bonus.
Open KOHO Free — No Fees — Code 45ET55JSYA