A Guide to Canada’s Top Consolidation Loan Providers
Whenever the topic of debt recovery comes up, a lot of attention is given to the more extreme options, such as consumer proposals and/or bankruptcy. While I have written about these topics in the past, I always preface these products as a last resort. After all, if you’re struggling to manage your debt, there are often better solutions that won’t negatively impact your credit rating. One of those is the consolidation loan.
What Is a Debt Consolidation Loan?
A consolidation loan is a term reducing loan taken out for the purpose of gathering a number of debts into one manageable payment. Ideally, the interest rate on a consolidation loan will be less that what you’re currently paying on your other unsecured credit products. Most often, the debts that are included in a consolidation loan are from high interest, revolving credit products such as major credit cards, retail store cards, or unsecured lines of credit.
What Are the Advantages to Debt Consolidation?
Debt consolidation holds a number of advantages for borrowers. I’ve listed 5 key benefits below. You may be able to think of some other ones as well. Let’s take a closer look at some of the ways a debt consolidation loan can help.
One Monthly Payment
Most people struggling to manage their debt have numerous bills to deal with simultaneously. For example, they may have balances owing on several credit cards, not to mention a car loan, or a line of credit. This makes it almost impossible to stick to any kind of strategy to pay off the debt. A debt consolidation loan helps by replacing all of your debts into one manageable payment.
Lower Interest Costs
If you’re carrying a balance on numerous credit cards, the high interest rates make it very difficult to pay down the balance owing. In fact, most of the minimum payment is going to cover the interest costs. If you can get a consolidation loan at a lower interest rate than what you’re paying on your other debts, it will not only save you money, you’ll pay off your debt more quickly.
Easier to Pay Off
Revolving credit products, such as credit cards and lines of credit, definitely serve a purpose. They offer the convenience of being able to re-borrow whenever you want to make a purchase. The downside is that the easy access to credit can make it difficult to stay out of debt. A consolidation loan is term reducing. You are granted a specific loan amount at the outset, and the balance goes down every time you make a payment, making it much easier to pay down debt.
Improve Cash Flow
Making payments on several credit products at once can cause a drain on your cash flow. Combining your debts into one consolidation loan often results in the borrower making a smaller monthly payment. This improves cash flow, freeing up money that you can use to build an emergency fund, or save towards retirement.
Boost Your Credit Rating
There are a lot of factors that go into building a good credit score. Interestingly enough, having available credit on a credit card or line of credit can help. But your credit rating can be negatively impacted if the balances on your credit cards are too close to the credit limit. You can improve your credit rating over the long term by closing some of your revolving credit balances, and replacing them with one, term reducing consolidation loan.
Downsides of a Consolidation Loan
Debt recovery companies that promote consumer proposal and bankruptcy may have you believe that there are a number of disadvantages to a debt consolidation loan, but I certainly don’t subscribe to that philosophy. If there is a drawback, it’s simply that you may struggle to qualify if your credit has already been adversely affected. If you have poor credit, your bank may be wary about taking on the bad debt that you’ve accumulated elsewhere. Because debt consolidation loans are usually unsecured, a decent credit report is essential in order to obtain approval. If you are struggling to get your debt consolidation loan approved, your bank may be willing to consider a co-signor.
Consolidate Using Your Home Equity
If you have equity built into your home, you may be able to consolidate debt using a mortgage refinance or home equity line of credit. This way, you’ll pay lower interest and have the option of spreading the monthly payment over a longer period of time. You have to be careful using your home as collateral, however. Setup fees, including legal and appraisal costs, can run in the hundreds of dollars. Not only that, but there’s a danger to continually borrowing against your home equity. That is, you don’t want to be paying your mortgage forever, and refinancing can drag out your biggest debt over several years.
Best Debt Consolidation Loan Options for 2020
When you’re shopping for a debt consolidation loan, chances are pretty good that you’ll start your search with your primary financial institution. And that’s as good a place as any. After all, if you have an established relationship and hold your savings with the same institution, they may be more willing to help when it comes to paying off your high interest debt. That said, if you’re unsure of where to consolidate your debt, or you don’t have a great relationship with your bank, here are a few options from which to begin your search.
Loan Amounts: Up to $35,000
Interest Rates: 5.6% – 29.9%
Terms offered: 3 to 5 years
Borrowell offers free credit monitoring to over 1 million Canadians. They are not a lender per se; rather, they are a credit monitoring company that connects customers to debt consolidation loan providers. I use Borrowell to monitor my credit score on a monthly basis, which is one of the reasons I like them. Because having good credit is so important, it’s worth signing up for this service alone. By giving Borrowell access to your credit information, they are able to connect you with loan offers through a variety of lenders. You’ll receive these offers automatically on a regular basis, or you can choose to submit an application at any time. The stronger your credit rating, the better the offers you’ll receive ie. lower rates.
Loan amounts: $500 to $300,000
Interest rates: 3% to 46.96%
Terms offered: 3 months to 5 years
Loans Canada provides Canadians with access to multiple lenders, and prioritizes speed when it comes to getting your application approved. In fact, you may be able to receive your funds as quickly as 48 hours. Because Loans Canada deals with so many different lenders, your chances of approval increase. Another benefit to Loans Canada is that you don’t have a minimum credit score to apply. Of course, the lower the score, the higher your interest rate will likely be.
Loan Amounts: $2,000 to $10,000
Interest rates: 34% and up
Terms offered: 12-60 months
Let’s get this out of the way up front. If you have good credit, LendingMate is not going to be the debt consolidation company for you. They can offer some of the most relaxed lending criteria for a reason. They charge very high interest rates. In fact, their rates are in many cases higher than what you would be paying on a credit card. LendingMate can be beneficial if your credit is very poor and you’re unable to get approved for a consolidation loan elsewhere. In this case, providing that the loan amount isn’t that high (their max is $10,000) and it’s your only option to consolidate, it may be a way to avoid filing for consumer proposal or bankruptcy. I should point out that LendingMate does allow you to pay your loan off early without penalty.
Loan amounts: $500 to $15,000
Interest rates: Starting at 18.9%
Terms offered: 6-60 months
If you have a credit score over 600, Ferratum may be worth checking out. They make things easy by delivering the entire consolidation loan application online. In fact, you can often receive approval within minutes of applying. Ferratum values repeat business and will offer higher loan amounts to those who return after paying off their first loan. They offer flexible terms of up to 60 months, a nice feature. According to their website, Ferratum encourages borrowers to reach out to their Customer Care team if they are struggling to make their loan payments. They may be in a position to find alternate payment arrangements to help you get back on track.
The one thing you should be wary of with Ferratum is that their loan interest rates start very high, at 18.9%. This is very close to a standard credit card interest rate. It may be a suitable option if the purpose of the loan is to close out debt that’s at a much higher rate, 30% or more, but otherwise, I would start by looking for a more reasonable rate elsewhere.
Loan amounts: up to $50,000
Interest rates: starting at 4.6%
Terms offered: 12 – 60 months
Like Borrowell and Loans Canada, LoanConnect can offer very low interest rates to qualifying customers. In fact, rates start at 4.6%, only a couple percent higher than where mortgage rates are currently at. When you apply, LoanConnect shops your application to its marketplace of more than 20 lenders, increasing your chances of approval. When you receive your loan offers, you’ll have the ability to connect with your lender of choice, and complete the application process from there. There is no minimum credit score requirement to apply through LoanConnect.
Consolidation Loan – Things to Consider
If you’re considering a consolidation loan, there are a few things you should consider. After all, if you’re not careful, you could end up stuck in a bad situation. Let’s take a closer look at some of the key features of a consolidation loan.
Interest Rate (APR)
Regardless of what your credit score might be, you should always try to get the lowest possible interest rate when you consolidate. The higher the rate, the more money you’ll pay in the end. The difference between a reasonable loan interest rate versus a high one can be downright shocking. For example, all things being equal, someone who takes out a $10,000 loan at 7% interest will pay approximately $1800 in interest over 5 years. At an interest rate of 34% (LendingMate’s starting rate), you would pay more than $9,200 in interest over the same 5 year period, a difference of almost $7500!
Most banks do not charge fees for taking out a personal loan, and if the loan is unsecured, it can usually be paid off in part or in full at anytime without penalty. In fact, I would not accept a loan that did not include this flexibility. Before you finalize your debt consolidation, make sure you read the fine print to avoid any hidden costs or other surprises.
This may seem like a no brainer, but before you shop your loan application with any of the companies featured in this article, make sure they can accommodate the loan amount you are looking for. For example, LoanConnect maxes out at $50,000 and Borrowell $35,000, while Ferratum Money and LendingMate lending maximums are $15,000 and $10,000 respectively.
Number of Times You Apply
If you are consolidating your debt through a loan, be careful not to submit applications with multiple lenders. Whenever you apply for credit, an inquiry is done on your bureau. Your attempts are recorded, and your score drops a little bit each time you apply. It’s best not to have more than a couple of credit inquiries within a six-month window.
Where Should I Go for My Consolidation Loan?
If, after reading this article, you feel as though a consolidation loan might be the right solution to meet your credit needs, your next step is to find a lender. If you have a solid relationship with a bank or credit union, it can never hurt to begin your search with your primary financial institution. Another option is to try out one of the loan companies I’ve highlighted in this article. Of the ones featured here, I recommend Borrowell, LoanConnect, and Loans Canada, as they offer the most reasonable rates of interest for qualified applicants. Unless your credit score is very poor, I would keep Ferratum Money (18.9% +) and LendingMate (34% +) as a last resort, although both offer plenty of convenience.