Is a Consolidation Loan a Good Choice for Me?

The answer to that question is:  Well, that depends on your circumstances.

The concept behind a consolidation loan is great.  You have a wallet full of high interest credit cards (or other high interest debts).  A bank gives you a loan to pay off all those debts.  Now you have a new loan.   It’s good because you’ve wrapped everything into one regular payment.  If the interest rate on the new loan is lower than the credit cards, it’s good because you’ve reduced the overall cost for yourself.  Furthermore, you’ve maintained your credit rating as long as you make payments on the consolidation loan.  Those are the positives.  What are some of the potential complications?

  • Consolidation loans are becoming more difficult to obtain due to global banking meltdown over the last few years
  • You may be required to have a co-signer.  Banks do this to protect themselves.  If you are unable to pay, the co-signer is responsible for the full amount of the debt.
  • You may be required to pledge assets as collateral for the loan (eg. house, car, investments, etc.)  Again, banks do this to protect themselves.  If you are unable to make the loan payments, they have the right to take the asset you have put up as security.
  • Some consolidation loans come at high interest rates.  If you haven’t reduced the interest rate compared to the old debts, you haven’t reduced your real cost.
  • The payment on a consolidation loan has to fit your budget.  Some people are in very far over their heads with high interest debt before they realize they have to do something.  Even with a lower interest rate, sometimes the payment just isn’t affordable.  Sometimes, people aren’t sure how much they can afford.  If you’ve been using credit to pay credit – robbing Peter to pay Paul, it’s hard to know exactly how much you can really afford on a monthly basis.

So what does that all mean for you?  Again, it comes back to your particular circumstances.  If you can get approved for a consolidation loan and the payment fits your budget, it’s probably a good choice.  Otherwise, you should start considering your other debt relief options.

Consider my role.  My job is not to convince people to file a consumer proposal or personal bankruptcy.   Those options are only for people who are unable to pay their debts in full.  If I think you are a good candidate for a consolidation loan, I’ll tell you so.  If you could sell assets or change your budget to pay your debts, I’ll tell you that too.  No two situations are exactly alike.  My job is to assess your circumstances and help you build a plan for your future.  If you want to talk more about your options, you can call me at 519-747-0660.  You can also send me your questions by e-mail.