Since credit cards and other forms of consumer debt often have double digit interest rates, it is little wonder that debt consolidation is such a popular debt relief option in Canada. Taking out a good debt consolidation loan can often save 5 percentage points or more on your debt interest payments.

Depending on your credit history, your interest rate savings could even surpass 10 percent. Your bank or credit union may charge 7% – 12% interest on debt consolidation loans. Some other finance company may charge 14% or more for secured loans, and up to over 30% for unsecured loans.

If your average interest rate on your consumer debt is 10 percent, cutting it down to five percent with a debt consolidation loan can reduce your interest payments by half.

Pay off your loan faster by making the same monthly payment you did prior to taking a consolidation loan.

As with other debt relief, a little education goes a long way. Learn how to pay off your debts, increase your credit score, and see improvements on your credit report.

There are many debt consolidation loans, and the way they calculate interest differs.

Fixed-Rate Vs. Variable-Rate Loans

You do not typically have to take loan rate types into account when you enroll in a debt settlement plan, but you need to know about them when researching debt consolidation loans. You have two major options to choose from for consolidation loans: fixed-rate loans and variable-rate loans.

Fixed-rate loans have an interest rate that remains the same for the length of your loan term. No matter how market conditions fluctuate, your payment remains the same because the interest rate never changes.

Variable-rate loans, on the other hand, have an interest rate that changes periodically. Every time the rate changes, your minimum loan payment increases or decreases according to the rate change.

Both variable-rate and fixed-rate consolidation loans are available whether you negotiate a debt consolidation loan yourself or you use the services of an experienced credit counselling service.

Debt Consolidation Loan Types

All debt consolidation loans have either a fixed rate of interest or a variable rate of interest, but there are still different types of loans, including:

Home Equity Line of Credit (HELOC)

The equity in your home secures a HELOC and usually carries a variable interest rate. This is a revolving line of credit, which may not be available if you have poor credit history.

Revolving Credit

Revolving credit means once you pay down a portion of your loan, that amount is immediately available for you to borrow from again. 

Scenario: You are approved for a $50,000 HELOC. You use $20,000 of that to pay off some consumer debt, leaving you with $30,000 in available credit. If you make a $10,000 payment to the HELOC, you now have $40,000 in available credit to use however you want.

Revolving credit differs from a traditional loan where you borrow once, repay the loan, and “finish” the loan.

Home Refinance Loan

Many people refinance their home and borrow more than they need so they can roll higher interest consumer debt into their less expensive mortgage. Refinance loans can have either a fixed or variable interest rate.

Second Mortgage

With a second mortgage, you borrow against the value of your home but retain the initial mortgage. This leaves you with two mortgage payments each month. However, it may be worth it if you can get a substantial interest reduction on the loan you use to pay off your consumer debt. The rate on a second mortgage can be fixed or variable.

Consumer Loan

A consumer loan is one of many unsecured loans. This means it is not secured by an asset. While many people have consumer loans that they must pay to avoid bankruptcy or a consumer proposal, a consumer loan may be a good consolidation loan for you if you qualify and get a good interest rate. Consumer loans can have a fixed rate of interest or a variable rate of interest.

How Are Debt Consolidation Loan Interest Rates Set?

You can predict interest rates on debt consolidation loans based on the prime interest rate and the bond market. When your consolidation loan is a mortgage product, banks set the variable rate by taking the prime interest rate and subtracting a few percentage points from it.

Fixed-rate mortgage loans that you might get are set by the bond market. Banks take the going rate for bonds and add one or two percentage points to calculate your rate.

Consumer debt consolidation loans can follow the above mortgage loan patterns they have their own rules set by the bank. In any case, you generally pay a higher rate of interest if you have bad credit.

Is a Debt Consolidation Loan Right for Me?

Ultimately, you should investigate all of your debt relief options before you make a final decision about a consumer loan. Try our debt consolidation calculator to get an idea of your payments, or fill out the debt relief form to learn more about getting out of credit card debt.