Consumers are turning to debt consolidation loans as a way to resolve credit card repayment. The growth in online lending is also creating new ways for borrowers to obtain these personal loans.
Your credit card payoff journey could be an easy one. This is particularly the case for prime borrowers (660 & higher FICO score), as there are low-rate loans available.
But the hard part is finding the right lender and obtaining a straightforward debt consolidation loan with no hidden fees.
Who Should Get a Debt Consolidation Loan?
These loans are not for everyone. Those who benefit the most from debt consolidation loans are prime borrowers.
That is because the biggest advantage of such a loan is that it gives you the ability to consolidate your debts at a lower interest rate.
Additionally, these loans are a type of instalment debt, and that can benefit your credit score in many ways.
Debt Consolidation Loans Explained
For starters, this term is misunderstood by some people — so much so that the Canadian government even describes debt consolidation loans in detail.
Anyway, people use these loans to pay multiple credit card debts off at once, which leaves a single large debt to worry about. This action is taken as a way to pay off high-interest debts that you are struggling to cover.
The average Canadian’s credit card debt and total household debt grows each year. As such, Canadians are warming up to debt consolidation loans and similar products (like lines of credit).
A debt consolidation loan is a type of instalment loan. That means the debt gets paid back under a fixed-term with a set payment rate. There is no chance to borrow again under the same loan. Therefore, the credit bureaus do not see it the same as credit cards, which are a type of revolving credit.
Any kind of revolving credit will have a significant impact on the calculation of your FICO score.
Say you have $10,000 owing on your credit cards with a $20,000 borrowing limit. That would mean your credit utilization rate is 50 percent. This rate will drop to 0 percent if you borrow $10,000 and pay your credit cards off.
Meanwhile, the inverse is also true. Spending $10,000 of your $20,000 card limit all toward loan repayment will boost your utilization rate from 0 to 50 percent.
Thus, it always makes sense, from a credit score perspective, to carry as much of your current debt load as possible through an instalment loan.
What Is a Debt Consolidation Program?
Some debt consolidation loans are made available via a “debt consolidation program.” Typically, this product is offered by debt relief and debt management service providers. It provides you with a more convenient way to achieve 100 percent credit card payoff.
Such a program will often run for a term of three to five years. The interest is low, and you can make a single payment each month to cover your credit card debts.
But, it requires approval from your creditors to happen, and your credit score stays held down for two years beyond the loan term. In many cases, this ends up limiting your score as much as a bankruptcy would.
There are also two types of debt consolidation programs — the ones ran by nonprofits, and the others operated by for-profits. You might find debt management to be a good solution.
If so, the right thing to do is work with a nonprofit company. The rest will have substantial fees and unfavorable terms, both up front and later on down the road.
Lending Arch’s debt consolidation loans are straightforward. If you need funds to cover your costly debts, look no further — apply online for an instant quote on a $1,000 to $15,000 debt consolidation loan.
Why Consolidate Your Debts?
Debt consolidation is a popular type of loan, regardless of where it comes from, but why?
There are many reasons to justify consolidating your debts if the circumstances are right. Take a look below at three broad examples to get a better idea of how these loans can help you.
1. Locking In Better Interest Rates
Most of the lower interest rate credit cards in Canada are around 11.99 percent. The high end is at about 24.99 percent, especially if you have cash advances.
These numbers are higher than what you would get with a traditional loan. Typically, you can find personal loans with APR rates well below the average credit card rate if you have good credit.
How exactly does this help?
Imagine if you sustain $20,000 in credit card debt for five years before it is paid in full.
A personal loan with a five-year term could run thousands of dollars less in interest. That means you could save a substantial amount by consolidating your credit card debts right now.
2. Improving Your Credit Score
A debt consolidation loan gives you a way to pay off your credit card debts. That puts your utilization rates as low as zero percent. Your utilization rate drop applies to both your combined and individual ratios. Your total debts do not go down, but your utilization rate is the largest factor in your credit score’s calculation.
This credit score boost comes without any side effects. Meanwhile, consolidating your debts through another credit card will be harmful.
By doing so, you are creating a new revolving credit line. That means the average credit age drops, which can harm your credit score.
Further, taking on a new credit card means your total credit availability increases. That decreases the maximum you are eligible to borrow when getting a mortgage.
You will not have access to your loan money after paying it off, so it does not interfere with your large purchase. The consolidation loan will also help with diversifying the types of credit lines on your file.
3. More Borrowing Capital Available
You are adding an instalment debt to your credit file while taking away the outstanding debt on your credit cards.
That makes it possible to spend the same amount on your credit cards again. Of course, you have to be careful and responsible, but this additional availability means you have immediate funds in the case of an emergency.
This increase in available funds occurs without upping your credit limits. Thus, the adverse effect that occurs when taking on a new card is not an issue here
You will also have an easy time qualifying for instalment loans in the future.
Finding Debt Consolidation Loans in Canada
Canadians can access debt consolidation loans through banks and private lenders. Banks do not have versatile lending options for consolidation loans.
With great credit, it might be possible to obtain a line of credit with a low-interest rate. If you go the private lender route, you can find both debt relief companies and personal loan issuers that specialize in debt consolidation.
But dealing with a debt relief company is not always a good idea. Some will require you to close your credit cards for good. That brings down the average age of your credit accounts, which is potentially damaging to your credit score.
Many debt relief companies will also make the payments and manage your debt on your behalf.
The most appealing consolidation loan providers in Canada will set an APR rate and charge an origination fee, nothing more. Meanwhile, debt management services come with a host of different potential expenses.
As for actually qualifying through a bank, there are a few hoops to jump through.
Your credit needs to be excellent or else you will get a scary interest rate quote. Further, many banks ask for some form of collateral — or only offer consolidation loans through products like HELOCs (Home Equity Lines of Credit).
Also, keep in mind that you cannot roll certain debts into your bank-approved consolidation loan — such as a car or home loan.
Why Should You Get Your Loan Online?
Online lenders are growing in popularity at a phenomenal rate. It is now pretty standard to turn to the internet as a source of financing, whether you are seeking a credit card, mortgage or anything else.
The borrowing journey at least begins online — as you research the different lending products and their rates. You are better off doing the whole thing online and taking advantage of the chance to get a quote or approval/rejection within minutes.
The other great thing is that all the terms are right in front of you. That makes it possible to know all the fees that will apply. You can even check out what the banks offer — and use their calculators to determine the loan cost, term and interest paid versus saved.
Basically, every major Canadian bank offers a debt consolidation loan calculator (CIBC for example).
Using Online Personal Loans to Consolidate Debt
A while ago there would only be a handful of lenders to choose from: basically, financial institutions and the odd private lender. Now there are endless lenders available online that offer personal loans for any reason.
You can pay off your credit card debts with an online personal loan in Canada — while saving money and improving your credit.
Even without securing the loan, it is possible to achieve an APR in the 10-15 percent range. That is often better than the rates you will receive at brick-and-mortar banks, which tend to only offer good rates for collateralized loans and secured lines of credit.
The online lenders also offer instant or fast approval and funding within just a few days.
The best part is that you have more control over the money. Some lenders handle the credit card repayment and deal with your creditors directly.
That is not usually the case when getting funds through an online personal loan provider. You will receive cash in your bank — sometimes within a day or two — and from there you can pay off your debts.
With a traditional debt consolidation program, the lender limits you to paying off credit card debts only. There is no room to cover your auto or home loan with these funds.
A standard personal loan through an online lender does not have the same restrictions. You will be able to use the funds to cover alternative credit types. But the benefit is most noticeable when tackling a debt with a higher interest rate — which is more common with credit cards.
How Does Borrowing From Lending Arch Work?
At LendingArch.ca, we offer personal loans for all sorts of reasons — education, medical emergencies, home improvement and much more.
You do not have to worry about the reason for why you need the loan, because the funds are given to you to pay off your credit cards, not paid by us to your creditors.
That means you can even tackle auto loans and mortgage payments with a personal consolidation loan from Lending Arch.
All you need to do is apply online for a debt consolidation loan and wait for your answer. It takes less than a minute to find out your pre-qualified rate. The entire process involves five steps:
- Make an account.
- Fill out your profile.
- Receive an offer.
- Verify yourself.
- Get the funds.
If you get approved, your loan of $1,000 to $15,000 will feature:
- Fixed interest rates
- A single monthly payment
- Funds to your bank account
The cost of your loan will be the principal, the interest you owe and your origination fee.
How to Avoid Debt Consolidation Loan Scams
Unfortunately, there are quite a few websites offering debt consolidation loans without providing optimal terms. These could get labelled as “scams,” and some certainly are.
Sometimes borrowers will sign up for debt management programs without realizing the difference. As mentioned earlier, this kind of program does not involve outright borrowing funds to pay off outstanding balances immediately.
The best arrangement is a consolidation loan that’s given as cash to pay your creditors. Many online lenders in Canada offer this type of product.
Even personal loan companies technically offer the same — but you might need collateral to secure attractive interest rates.
Hopefully, you have figured out the type of financing that is right for you. The next step is making sure to research the lender before you apply.
There are many ways you can do this — from a simple Google search to checking for Better Business Bureau (BBB) complaints, looking for social media comments, feedback on forums and so on.
Also, do not assume that you are in the clear if there are no bad comments about the business. There are plenty fly-by-night loan shops online that exist solely for fast scams and to grab identity credentials.
There should be a bit of relevance and professional stance that shows up after these steps. If not, the company is too fresh or simply a scam.
Debt Consolidation Loan FAQs
There are certainly use cases for debt consolidation loans. Before taking advantage of this helpful lending product, make sure to cover any concerns or questions you have.
The list below contains FAQs on debt consolidation loans that should help get you started.
Answer: Credit score damage might be the biggest fear for borrowers looking for refinancing options to cover pricey debts. The simple answer is “no,” but there are still some things to consider.
A debt consolidation loan covers your amounts owing, which means you could run up your credit cards once more and double down your total debt. That makes it essential for you to remain diligent when paying off the consolidation loan.
After you do, there will be much less debt than before, and your credit utilization rate for your cards will be lower. These are both big pluses for your credit score. They will override the negative impact from getting the consolidation loan in the first place.
But, it is mostly the hard inquiry and initial debt load that temporarily holds your score down.
Further, what if this is the first time you took out any kind of loan? Credit cards are revolving debt, but loans are installment debt — a whole different type, which means a higher credit diversity for your borrower profile.
That is another plus for your credit score, as FICO weighs 10 percent of your rating calculation according to your credit mix.
Answer: The length of your loan term is up to your lender. Shop around to find the right arrangements; in most cases, borrowers shoot for a repayment term of one to five years.
The goal is to pay the debt off as fast as possible though; the more debt you have paid off, the better it will be for your credit score.
Also, remember that there are little tricks you can do to make your term last longer. You could pay off the remainder of a consolidation loan with your credit cards.
You can then take out a new loan, and for a lower amount, to cover your card debts again. That means you do not need to stress over paying it off 100 percent by the term end — like you would with a 0 percent intro offer, which applies the entire interest at once if you fail to pay in time.
Answer: Many Canadians look for balance transfer cards to help manage credit card debt. These cards do not do much more than bring down the amount you spend on interest. Your credit utilization rate will lower across the grid, but to make this happen, you will have a higher ratio on your balance transfer card.
The combined and individual metrics account for 30 percent of your FICO score calculation. What’s even worse is that your new balance transfer card would bring down your average account age, which makes up 15 percent of your FICO score.
In the same sense, it would not be a good idea to get a credit card with a 0 percent interest intro offer.
This kind of card will reduce your average credit age, increase certain credit utilization metrics and lift your total debts.
The two main types of lending products when consolidating debt are lines of credit and personal loans. With a line of credit, it is possible to achieve interest rates near the prime borrowing rate.
Personal loans are slightly more expensive yet still price under almost any credit card.
Banks provide lines of credit to account holders with strong credit scores and positive banking relations. The APR rate for a line of credit in Canada can run as low as 2.7 percent in some cases.
That is a great option if you qualify, but if not, a personal loan can suffice, and for prime borrowers, it still means an APR below 15 percent.
Answer: Credit repair companies focus primarily on fixing inaccuracies on your credit report. These errors can significantly hold back your FICO score. Once fixed, it will go up and you will be able to qualify for financing with more favourable terms.
However, credit repair companies do not typically offer debt consolidation loans. They just work on your credit file and make sure everything matches without any costly errors. These services are primarily helpful for victims of identity theft.
Answer: This type of business works almost exactly the same as a debt consolidation provider. The only real difference is that you are getting credit counselling help.
Credit counselling is especially valuable for subprime borrowers, yet even those with excellent credit can benefit. You can obtain a debt consolidation loan through a debt management service, too.