Debt Consolidation Loans in Canada: Unsecured and Secured Loan Options for Canadians With Money Problems

Debt consolidation loans are a viable option for Canadians seeking to be debt free. Individuals owing money to multiple creditors (such as credit card, charge companies and/or public utilities) should consider a consolidation loan as an option to manage and eliminate debt.

What is a Debt Consolidation Loan?

A debt consolidation loan is a loan from a Canadian bank or other financial institution that allows customers to repay debts to multiple creditors via one single monthly payment to said financial institution. Typically the customer will ask the financial institution for a loan amount equal to the total amount of money owed to the customer’s various creditors. If the loan is approved, the bank will settle the customer’s debts and the customer needs only to be concerned with paying back the one debt consolidation loan.

Depending on the type of consolidation loan, the customer may also benefit from a lower interest rate than that offered by the other creditors. This interest rate varies from bank to bank and should be researched before committing to a debt consolidation loan.

Secured Loans vs. Unsecured Loans

There are two types of debt consolidation loans: secured loans and unsecured loans. In a secured consolidation loan, the borrower agrees to back the loan with collateral such as property. This means that the lender has the right to seize the borrower’s home or car if the borrower cannot maintain the loan repayments. This type of loan can be problematic especially if the borrower is forced to deal with some unforeseen financial burden which can hinder the ability to continue making loan payments.

Contrary to a secured loan, an unsecured debt consolidation loan is not secured by possessions such as automobiles or houses. In the case of an unsecured loan, the borrower is free from committing collateral to the loan agreement but is often subject to a higher interest rate than that of a secured consolidation loan. In fact the interest rate on an unsecured debt consolidation loan can be higher than the rates charged by the borrower’s other creditors.

Advantages of a Consolidating Loan

Besides the potential for a lower interest rate, there are other advantages to consolidating debt into one loan. Assuming all of the creditors are paid promptly once the debt consolidation loan is approved, the customer has a good chance of maintaining a decent credit rating. Furthermore, if the loan payments are made on time for the duration of the agreement, then the customer’s credit rating should not be adversely effected.

Disadvantages of Consolidating Loans

Despite the advantages mentioned above, debt consolidation can be disadvantageous for some people. For example, if the customer continues to use credit cards and accounts that have been consolidated, the danger exists of incurring even more debt. And if such as situation occurs, banks and financial institutions tend to be less sympathetic to missed payments than other creditors.

Using a Debt Consolidation Loan to Become Debt Free

Canadians seeking relief from money problems due to excessive debts should do some research on debt consolidation loans offered from local banks and other financial institutions. Depending on the individual, an unsecured loan maybe a better option than a secured loan or vice versa.

Furthermore, there are other debt free solutions outside of consolidation such as debt management plans. Most financial institutions can offer information on these and the other alternatives to unsecured and secured consolidation loans.