What Is Debt Consolidation? How It Works & Debt Relief Options

Ever feel like you’re juggling too many bills at once? You’re not alone. In 2025, household debt in Canada has climbed to record highs, with it now sitting at over $3 trillion. A big part of that increase comes from credit card balances, which have been rising month after month.

With debt piling up, it’s no wonder many Canadians are searching for ways to make their payments more manageable. That’s where debt consolidation often comes up. It’s a popular strategy that combines multiple debts into one payment, but it’s not always the real debt relief people hope for.

What is Debt Consolidation?

So, what is debt consolidation? At its core, it’s when you combine multiple debts into one new loan or payment. Instead of managing a handful of different due dates and interest rates, you roll everything into one monthly payment.

How Debt Consolidation Works

Debt consolidation involves taking out a loan (or another credit product) to pay off all your existing debts. You’re left with one payment to a single lender, usually at a fixed interest rate. This is called the debt consolidation process.

Here’s what to keep in mind:

• Consolidation doesn’t lower your total debt.
• It can simplify repayment with one monthly bill instead of several.

• Interest rates range anywhere from 7% to over 30% depending on your credit score.

While it can bring short-term relief, for some, that single structured payment helps. But for many, high interest rates and fees make it harder to ever get ahead.

Types Of Debt Consolidation in Canada

Debt Consolidation Loans

These are the classic option you’ll see at banks, credit unions, or even online lenders. The idea is simple: roll all your debts into one loan with a fixed interest rate, and from then on you only have to deal with one lender and one payment.

Personal Loans

In this situation, you borrow one larger loan, use it to wipe out your smaller ones, and then you’re left with just a single payment to focus on each month.

Balance Transfer Credit Cards

If most of your debt is sitting on credit cards, a balance transfer card might sound appealing. You move your balances onto one card that offers a super low intro rate.

The catch? That interest rate usually expires fast, so you need to pay it off before the promo ends, otherwise those interest charges can skyrocket.

Home Equity Lines of Credit (HELOC)

For homeowners, a HELOC means borrowing against your home’s value to consolidate debt at a lower interest rate.

It can free up cash and simplify payments, but here’s the big warning: your house is on the line. Miss payments, and you could risk losing it.

Pros and Cons of Debt Consolidation

Like any financial strategy, debt consolidation loans come with its upsides and downsides — here’s a quick look at the pros and cons to help you see if it might be the right fit for you.

Pros:

• One predictable monthly payment
• Potentially lower interest if you qualify for a strong rate
• A structured repayment plan

Cons:

• High interest rates for those with damaged credit (up to 30% in Canada in 2025)
• Doesn’t reduce your debt, only restructures it
• Fees and penalties may apply
• Can lead to a high monthly payment depending on the length (term) of the loan

The Debt Consolidation Process

If you do choose to go down the consolidation loans route, here’s how the process usually works:

• Review your budget: Take a close look at your income and expenses to figure out what you can realistically afford each month. This helps you avoid taking on a loan that’s too big to handle.
• Apply for a consolidation loan: Submit an application to a bank, credit union, or online lender. Try not to do too many applications in a short period of time, since too many credit checks can lower your score.
• Use the loan to pay off your debts: Once approved, you’ll use the funds to pay off your existing credit cards or loans in full.
• Close old accounts: To avoid the temptation of racking up balances again, close accounts you no longer need.
• Start making payments: Pay your new consolidation loan on time each month.
• Follow up: Once the loan is paid off, get written confirmation from the lender and check your credit report to make sure everything is reported accurately.

Common Pitfalls to Avoid

One of the easiest traps to fall into after consolidating debt is going right back to using your credit cards the same way you used to. Your balances might be cleared, but if you swipe like nothing’s changed, you’ll just end up with the same problem all over again… only now with a bigger loan on top of it.

Another pitfall is not paying attention to the fine print. A lot of consolidation loans or balance transfer cards look great at first, but that low teaser rate can disappear in a few months. Suddenly, you’re stuck with sky-high interest and hidden fees you didn’t plan for.

And here’s the thing: the debt consolidation process won’t magically fix overspending. If you don’t change the way you manage your money, it’s just a temporary solution. Sticking to a budget and breaking old spending habits is what really makes consolidation work.

Alternatives to Debt Consolidation

Debt consolidation isn’t the only way to deal with what you owe — and in many cases, it’s not the best option. If you’re already struggling with debt, consider these alternatives:

• Consumer proposal: A legal process where a Licensed Insolvency Trustee negotiates with creditors to reduce your debt by up to 80%.
• Bankruptcy: A last resort, but sometimes the right choice when debt is unmanageable.
• Debt Counselling: Working with a non-profit or professional credit counsellor can help you build a budget, negotiate lower interest rates, and learn better money habits. It won’t reduce your debt the way a legal process might, but it can give you structure and support.
• Working with an LIT: Licensed Insolvency Trustees (LIT) are government-regulated and can explain all debt relief options in Canada, not just loans.

These solutions don’t just simplify your payments but can actually reduce how much you owe, something debt consolidation loans don’t do.

How Farber can help

At Farber, we don’t sell loans.

Instead, we help thousands of Canadians find real debt relief solutions. Our Licensed Insolvency Trustees can work directly with your creditors, reduce the amount you owe, and stop collection calls.

If you’re feeling weighed down by debt, we can do the same for you. Book a free consultation with Farber today to explore your debt relief options in Canada.

FAQ

What is debt consolidation?

Debt consolidation is when you roll multiple debts into one new loan or payment, usually through a bank, credit card, or home equity loan. It simplifies payments but doesn’t reduce what you owe.

How does debt consolidation work in Canada?

In Canada, debt consolidation works by taking out a loan or product like a balance transfer card to pay off your existing debts. You’re left with one monthly payment, which may come with lower interest if you qualify.

What are alternatives to debt consolidation?

Alternatives include consumer proposals, bankruptcy, and other debt relief options managed by Licensed Insolvency Trustees. These can actually reduce your debt, not just restructure it.

Is debt consolidation right for me?

It depends. If you have good credit and stable income, it may simplify your payments. But if your credit is already damaged or you’re overwhelmed, alternatives like a consumer proposal may be safer and more effective.