2025-06-16
Understanding your financial health
Lifestyle Debt
Take a good, hard look at your financial situation to decide where to focus your efforts.
Financial jargon can be murky at the best of times. Downright frustrating when you’re sinking in the depths of unmanageable debt. You’ll often hear “consolidation” recommended as a top option to simplify payments and reduce costs. But it’s not always clear what that means.
Here, we aim to provide some clarity on your options — including an overview of how each solution works, situations where each may be practical, and their potential drawbacks.
Debt consolidation is the process of securing a personal loan from a bank or private lender to pay off multiple outstanding debts. This loan would ideally provide a lower interest rate than your existing debts and be sizable enough to combine (or consolidate) all unsecured debts (e.g. credit cards, personal loans, etc.) into a single monthly payment.
A favourable consolidation loan would help you to:
Because your loan should have a lower interest rate than the debts you’re consolidating, it would ideally grow much slower than a typical credit card or a payday loan. This means you could put more funds toward the principal value every month, making it easier to pay off.
It may also help you decrease your utilization rate, prevent missed or partial payments, and avoid a Bankruptcy, Consumer Proposal or debt management plan — all of which reduce negative impacts to your credit rating.
There are two main concerns to be aware of:
The biggest risk is your debt may actually increase over time. Most lenders will not require you to cancel credit cards or lines of credit as a prerequisite to receiving a consolidation loan. Once you’ve paid off your revolving credit, your own self discipline is the only thing stopping you from using it again.
For example, imagine you want a $15,000 consolidation loan to pay off your two credit cards ($6,300 and $3,500, at 19.99% APR), a line of credit ($4,100 at 4.5% APR), and a personal loan ($1,100 at 6.4% APR). Your bank offers you the full value at 10.5 percent over five years — two and a half percent less than the average of all your existing debts.
At 2.5 percent less than the average of your existing debts, it certainly looks like a good deal. But is it really?
Of course, it would make sense to pay off your credit card balances because the annual interest rate is nearly half what you’re paying right now. This could save you $83 per month or up to $4,980 over five years. However, you would not want to consolidate your line of credit balance or your personal loan. It would nearly double your interest payments and could cost you close to $1,000 more over the same period.
You could decide to accept only the $9,800 need to pay off your credit cards and continue making payments on the lower interest debts as usual. However, depending on your financial situation, you may benefit more from a different credit consolidation option discussed below.
Consolidation loans can be a highly effective option, but they’re not right for everyone. Those who benefit most from debt consolidation typically have:
Debt consolidation is not the only tool available to consolidate your credit — nor is it always the best. Depending on your situation, one of the following options may provide the simplicity, financial relief, and structure you require to eliminate your debt.
Credit card providers will sometimes offer you the opportunity to transfer a prequalified balance from third-party credit cards at an extremely low rate (e.g. zero to five percent). These balance of account transfers are usually valid for a limited time (usually six months to a year) and may also include a one-time transaction fee of one to three percent on any funds transferred.
This option can be helping in reducing the amount and cost of your credit card debt. However, approach these offers with extreme caution and be sure to read the fine print. The bank or card issuer will often charge the full interest rate on the entire balance transferred if you fail to pay it off within the specified offer period — which can create serious difficulties if you’re not prepared.
A word of caution, though. Many lines of credit allow for interest only payments. You’ll need to be diligent about paying down the principal value, else you could find yourself paying more in interest — just over a longer timeframe.
However, there are three obvious concerns with this option:
Be sure to discuss these matters candidly and extensively before any money changes hands. It’s also advisable to put any agreements in writing.
A debt management plan is a service provided by credit counselling organizations to pay down many of your unsecured debts via a single monthly payment. The credit counselor will negotiate with your creditors on your behalf both to secure their participation as well as reduce (and ideally eliminate) interest charges. You would make only one monthly payment to the credit counsellor, who distributes these funds to your creditors.
While debt management plans can be effective, there are some concerns to be aware of:
A Consumer Proposal is a formal debt solution provided by the federal government under the Bankruptcy and Insolvency Act (BIA) and which only a Licensed Insolvency Trustee may administer. This legally binding agreement would consolidate all your debts into a single, interest free monthly payment often at a fraction of their original value.
You may pay your Consumer Proposal either as a one-time lump sum or in monthly installments over a period of up to five years. Because a Consumer Proposal is based on your ability to pay, these payments would be affordable within your budget and provide a clear path for you to become debt free.
As above, there are some potential drawbacks of a Consumer Proposal you need to be aware of:
However, these drawbacks are usually more than offset by the following benefits:
With so many different consolidation options to choose from, it can be difficult to know which one is best for you. Licensed Insolvency Trustees always offer a no-obligation Free Confidential Consultation to review your situation, understand your challenges, and discuss your goals. They will thoroughly explain every solution available to you and offer an unbiased opinion on which one(s) would likely work best for you.
If you’re struggling with significant debt, having trouble keeping up with payments, and worry nothing you do seems to be helping, you don’t have to struggle alone. Reach out to MNP today to discover how you can begin getting a financial fresh start today.
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