Pitfalls of High-Cost Consolidation Loans (+ Alternatives)

Effectively managing your debt gives way to different strategies that need to be considered. One such strategy is consolidating multiple different loans down to one larger loan. High-cost loan consolidation can be a great strategy for some individuals; however, you must weigh both the advantages and disadvantages in order to make an informed decision. 

What is Loan Consolidation?

Loan consolidation is the process of combining multiple smaller loans into one large loan. Studies have shown that the Canadian debt to income ratio has increased 186.2%, translating to a liability of $1.86 for every $1 of disposable income (Wells, Financial Post). Taking these statistics into consideration means you may have a few outstanding loans that you are struggling to pay. Credit cards are the most common form of debt Canadians consolidate due to the high interest rates.  

What are the Disadvantages?

Many Canadians believe that once loan consolidation is complete that it will automatically improve their financial position; however, this is not always the case. Consolidating loans does not give assurance that your outstanding loan balances won’t revert back to unhealthy levels. Instead, it provides a temporary solution until you rework your spending habits. Additionally, loan consolidation often comes with high up-front costs. Loan origination fees, transfer fees, annual fees, and closing costs can all be assessed based on the financial institution or lender you go through. Before you sign any agreement, it’s best to consult with an expert, like Faber Inc.

Loan consolidation also can impact your credit score. Too many hard inquiries in a time period can have a negative effect on your credit score, creating a disadvantage. Moreover, if you miss any payments, it can worsen your situation through stiff late payment fees, interest, and penalties. Finally, there is a risk that you will end up with a higher interest rate compared to keeping your individual loans. 

What are the Advantages?

There are a few different advantages of loan consolidation that attract Canadians. First, loan consolidation gives you the ability to repay debt sooner with less interest being paid on each loan. Most credit cards have a set timeline of when payments need to be made. If you have multiple credit card balances outstanding, you may frequently miss payments. On the contrary, debt consolidation creates only one monthly payment, giving you access to stronger financial management. 

Another top advantage of loan consolidation is the ability to lower your interest rates. Credit card interest rates can reach upwards of 15%, racking up significant amounts depending on your debt burden. One large loan has the ability to reduce this interest rate all while providing you with a set repayment schedule to improve your financial situation. 


Loan consolidation comes with advantages and disadvantages that need to be considered. Working through the pros and cons on your own can be an overwhelming task, which is why the loan experts at Faber Inc are here to help. Faber Inc frequently works with clients to uncover the best route to tackling a debt burden tailored to their financial situation. Reach out to Faber Inc today for more information. 


Wells, Victoria. “Posthaste: Canadians are richer than ever before – and they’ve never had so much debt.” Financial Post, 16 March 2022, https://financialpost.com/executive/executive-summary/posthaste-canadians-are-richer-than-ever-before-and-theyve-never-had-so-much-debt#:~:text=At%20the%20same%20time%2C%20the,every%20dollar%20of%20disposable%20income. Accessed 3 May 2022.