Advantages and Disadvantages of Debt Consolidation

Consolidating your financial obligations into one loan will make managing your debt a lot easier.  But before you consider this option, you need to be fully aware of the risks as well as the benefits.

Is debt consolidation a good idea? And is it the right choice for you? 

Go through our list of advantages and disadvantages of debt consolidation to find out.

Debt Consolidation Advantages

How can consumers benefit from debt consolidation loans?

Quicker Debt Repayment

One of the biggest pros to debt consolidation: you can pay off your debt faster. 

Since you’ll only have to make a single monthly payment instead of multiple ones, you can put more money toward repaying your debt each month, which will bring you closer to financial freedom. Plus you can repay everything at once rather than paying off portions of each debt individually, which will save you both time and money.

Easy Finance Management

When you have multiple debts, it can get overwhelming to keep track of several payments and ensure they are made on time. With debt consolidation, you’ll only have to make one payment monthly. In turn, this makes debt management much simpler.

What’s more, since payments are fixed, you’ll know exactly how much to set aside each month. Debt consolidation also reduces the risk of late payments which can be detrimental to your credit score and tend to incur higher charges from your lender. 


Lower Interest Rates

When you are paying off multiple debts, you are also paying interest on each of those loans. However by merging all your obligations into one payment, you will effectively pay interest on one payment each month, thereby saving a lot of money. 

On top of that, debt consolidation loans usually have lower interest rates than credit cards. In fact, while interest on credit cards can go up to 19% (or 22% for cash advances), some of the best debt consolidation loans in Canada come with interest rates as low as 9.99% a year. 

Keep in mind though that the interest your loan incurs depends on the lender and your personal circumstances, such as your credit score, employment history and affordability.

Lower Ongoing Fees

In addition to paying interest on each loan, you also pay ongoing management fees. However, when you combine several debts into one, you will only pay administration charges on one loan, significantly reducing monthly expenses. 

Set Repayment Schedule

Unlike credit cards, which do not have a fixed repayment timeline, most debt consolidation loans are offered with a fixed payment schedule. Therefore, you’ll always know when, where, and how much you’re supposed to pay as well as when the final payment is due. 

Improved Credit Score

Last but not least, debt consolidation can give your credit report a boost. Your credit rating might be hit when you initially apply for the loan, but if you make regular payments, you will be able to get positive marks on your payment history and thus improve your credit score faster

Debt Consolidation Disadvantages

Here are some risks that come with a debt consolidation loan.

Higher monthly payments 

Even though you can get lower interest rates and save some money on loan repayments, you will still have to make a sizable monthly payment on your combined liabilities. If you couldn’t afford to repay several smaller loans, you might face bigger issues when it comes to repaying all those debts in one go.

Collateral Might Be Required

Some banks and lenders might require collateral as security for the loan, which can be anything from getting a second mortgage on your home to using your car to secure a loan. If you default on the payments, you risk losing your home or possessions.

Possible Higher Rates

If your credit score has not improved since you last took out a loan, banks and lenders are not likely to offer more favourable terms and rates. Actually, many financial institutions will not approve you for a debt consolidation loan if your credit rating is subpar or if you have an unstable income. 

Even if your credit score has improved, you may still end up paying more in interest on the loan if you choose a longer term. Long-term loans might be more expensive to repay, even if they have lower rates, since they accumulate interest over time. 

Before you decide on a lender, consider whether you want a short or long-term loan. Calculate how much both will cost you over the life of the loan and pick the option that best suits your budget. 

Note: Most lenders have online calculators you can use to get an idea of how much each financing option would cost you.

Possibility of Going Back into Debt

Lastly, it’s important to note that debt consolidation is no guarantee that you will be debt-free forever. This option can help you repay the debt you currently owe, but unless you figure out a way to manage your finances better and start saving for unexpected costs, you may soon end up in debt again.

Debt Consolidation Loans 

There are several types of debt consolidation loans available in Canada. Here is a brief overview of the most common ones. 

Personal Loans 

This is the most common type of consolidation loan offered. Like other types of loans on the market, lenders offer personal loans with a low-interest rate to low-risk borrowers, whereas those with bad credit and no income are not likely to get approved. 

Home Equity Loans 

This option allows borrowers to release the equity in their homes and use it to pay off their outstanding loan balances. However, this way you are using your home as collateral, which means you might lose it if you default on payments.

Balance Transfer Credit Cards 

This is a debt consolidation option designed for people with high credit card debt. These loans usually come with no interest in the first year (or during the first months), but they tend to incur upfront costs and hefty penalties. Consolidating with credit cards is only recommended for those with exceptional financial discipline—in fact, the Credit Counselling Society warns that it can be very easy to overspend and get back into debt again since you are not charged anything in the beginning.

How to Get a Debt Consolidation Loan

Applying for a debt consolidation loan is pretty similar to getting a regular loan from a bank or credit union. These are the steps to follow:

  1. Check your credit score—there are several convenient ways you can check your credit rating to find out if you qualify for a debt consolidation loan. 
  2. Compare lendersThe FCAC recommends comparing several lenders and looking at the interest rates in particular, as well as other fees, the length of the loan and the amount each lender offers. Most banks, credit unions and credit card companies offer debt consolidation loans, so you can easily find lenders to compare. 
  3. Apply for the loan by providing your personal and financial details. Keep in mind that lenders are not likely to approve you if
  • You have excessive debt or are very late with payments 
  • There are big black marks on your credit report
  • Your income is not enough to cover the loan repayments

4. If approved, pay off your existing creditors.


Bottom Line: Should You Consolidate Your Debt?

So, is debt consolidation good or bad

The truth is, it depends on your unique situation. For some, it can be a saving grace, while for others it can solve one issue, but create more along the way. 

In general, though, debt consolidation could be a good option if you 

  • Have a good credit scoreaccording to Equifax anything over 660 is considered a good credit score, so if you fall in this category, you could get the most out of a debt consolidation loan in the form of lower interest rates. 
  • You can afford to pay off debts, but have a hard time managing several obligations at once—Your debts have to be repaid, whether separately or bundled into one easy-to-manage loan. If you cannot afford to make monthly repayments on either, you need to look into other ways to manage your debt.

Still, you need to consider your options carefully or perhaps even consult a financial advisor on the best course of action.


What are the disadvantages of consolidation?

Debt consolidation loans can help you manage your finances, but there are downsides to consider. Most lenders will require some form of collateral, such as your house, which means you can lose your home if you fail to make repayments. What’s more, if you have a poor credit rating or no income, you might not qualify for lower interest rates. 

What is an advantage of debt consolidation?

One of the biggest pros of merging your debts into one easily-managed loan is lower rates. Instead of paying off several loans to different creditors, you will have one outstanding balance with a single lender and therefore only one account on which interest is accumulated. What’s more, you will pay one set of administration and late payment fees, which could significantly reduce your monthly repayments.

Does consolidating my debt hurt my credit score?

Initially, yes, consolidating your debt will lower your credit score because of the hard inquiry on your credit. However, debt consolidation will actually improve your credit score since regular and timely payments can give your credit score a quick boost.

Which is better consolidation vs loan?

You could take out a personal loan and use the money to pay off your debts instead of opting for a consolidation loan. When comparing the advantages and disadvantages of debt consolidation vs personal loans, one upside to the latter is that they are unsecured, i.e. there will be no need to put your home or belongings as collateral for the loan. That said, personal loans can come with higher interest rates, particularly if your credit score is less than stellar. 


When Angela combined her deep-seated love for linguistics with her growing interest for finance and money management, she struck a gold mine. She’s scoured the internet far and wide for all things related to money and finances, including payments, budgeting and investing. Now she’s eager to share her knowledge and skills with the world, determined to make it a better place. In her free time, she loves to read a good book.

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