Consolidation Loans - A popular debt settlement strategy, but will it work for you?

Chris Welker explains how consolidation loans can be a good option, but if your credit score is hurting or you don't have any assets, you likely won't qualify for the loan.

What is a Consolidation Loan?

Debt Consolidation Loans are a popular debt management option for people who are experiencing money problems.

Using a consolidation loan to manage your personal debts will:

  • Consolidate your personal debts into one monthly payment
  • Reduce interest charges
  • Will not damage your credit rating

What issues may I run into if I use a consolidation loan to address my money problems?

Difficult to qualify for loan:

  • Must have an excellent credit rating
  • Collateral is often required (house equity, car, etc.)
  • May need a co-signer 

Not always a complete solution:

  • Creditors will often consolidate their own debts but not others
  • Not a good option unless all personal debts are included

Affordability of payments:

  • Payments include 100% of amount owed plus interest
  • Higher payments than other debt settlement options
  • Calculate Payments

When is a Debt Consolidation Loan a good option?

  • More assets than personal debts (not insolvent)
  • High income and can afford to pay all debts including interest
  • Own assets that can be used as collateral for loan
  • An excellent credit rating

What issues may arise if I use a second mortgage as a Debt Consolidation Loan?

  • May not have enough equity to consolidate all debts
  • High interest rates
  • Can affect your ability to sell your property in the future
  • Amortizes debts over a long period of time
  • If property is owned jointly and debts are in one spouse’s name the second mortgage will cause both spouses to become liable for debts

What if a Debt Consolidation Loan isn't enough?

Debt Consolidation Loans and second mortgages can be a good a debt management option provided that you qualify, they consolidate all debts, and the payments are affordable. If your debt consolidation loan only gives you enough money to pay some of your creditors or the payments are unaffordable you should consider other debt settlement options such as filing personal bankruptcy or making a consumer proposal.

More Topics

Find out more about your situation. Jump to a different topic below.

Consumer Proposals

A consumer proposal is a formal debt settlement option legislated under the Bankruptcy and Insolvency Act and is filed with a licensed insolvency trustee. This option stops further creditor action and allows your debts to be compromised.


Filing personal bankruptcy allows you to be released from most of your debts. It is a formal process under the Bankruptcy and Insolvency Act and is filed by a licensed insolvency trustee.

Credit Counselling

Credit Counsellors can help you with budgeting and money management, filing a Debt Management Plan or by helping you communicate with your creditors. It typically makes sense to use a credit counsellor if you have a relatively small amount of debt.

Dealing With Collection Agencies and Wage Garnishment

Collection Agencies may take legal action against you if you owe money to your creditors and do not make payments. Collection Agencies must follow rules outlined in the Collection Agencies Act, which is regulated by the government.

Rebuilding Credit

Credit rating is a fluid concept and is always changing. No matter what you do, including filing personal bankruptcy or a consumer proposal, you can always rebuild your credit rating.

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