Debt Consolidation: Pros & Cons, How it Works (With a Chart!)

‘Debt consolidation’ can mean many things, but the basics are: any effort by a person to convert multiple debts into one on a monthly basis with a view to eventually paying off those debts.

The driving force behind this has usually got to do with simplification. People are stressed enough: they don’t want to juggle multiple complicated payments to multiple institutions. A monthly chore seems to happen without pause.

Under normal circumstances, anybody in such a position is often having money troubles in the first place. Otherwise, balances would not have been run up on multiple debts. Usually, people in such a situation are dealing with several credit cards and a line of credit or two.

There are usually 3 types of what people (sometimes wrongly) refer to as ‘debt consolidation’:

  1. A loan taken out to pay off (consolidate) all outstanding unsecured debts.
  2. A ‘program’ of some kind, usually via a credit counselor or service.
  3. A Consumer Proposal.

Let’s take a very brief look at each in this MASSIVELY CONVENIENT CHART:

(assume $30,000 in total debt)






Simplicity – one payment

Lower interest rate than before

No credit impact

You still have debt

You are still paying interest

You’ve not paid anything down yet

Success relies largely on discipline

Taxes not included



Budgeted, structured program

No credit impact

Not a formal/legal action

No legal release upon completion

Creditors may opt out at any time

Taxes not included

No forgiveness on principle amount

No forgiveness on interest



0% interest

Reduction in principle

Income tax/HST included

Single mo. payment – principle only

Full legal release of debt

No loan – just payments 

Open terms – free to accelerate it

Budgeted, structured prog

Credit rating impact – R7 (3 yrs)

No unsecured debt during proposal


*Based on average lending rates, normal credit counseling programs and average declared assets & net income; principle reduction in proposal based on averages accepted by creditors

How it works?

Speak to a Licensed Trustee (LIT) for a free consultation. They are legally obligated to present all options available to you – for free. It never hurts to ask!