Consolidation Loan

It may be possible for you to borrow enough money at a bank to settle with your creditors. In many cases, because your request for a consolidation loan is an admission of your inability to meet your debts as they become due, banks will insist that their loans to you are either secured by your assets or co-signed by someone you know.

What the banks are really saying to you is that they do not want to lend the money to you without the security of holding your assets or having a co-signor to pay if you cannot.

The first thing that should be considered when trying to decide if a consolidation loan is an alternative that you should consider is can you afford the payment terms? You may be surprised to find out that your monthly payments on a consolidation loan are not significantly less than the payments that you were already making to your creditors! You have to have sufficient cash to cover your living expenses.

As discussed elsewhere on this site, you may have assets that your creditors cannot seize or sell. The protection afforded to you under provincial legislation is lost if you use these protected assets to secure a new loan. The bank advancing that loan will have the right to seize and sell these assets if you do not make the payments required on your consolidation loan.

Many people make the mistake of pledging their home as security for loans and then lose their homes when they cannot pay the loans secured by their homes.

Cash flow is really important. If you do not believe that you can make the new consolidation loan payments on your own, you probably should not be getting a consolidation loan. You are really putting people you ask to co-sign your loan at risk…When you don’t or can’t pay, they have to pay your payments for you!

Many times family relationships and friendships are destroyed when co-signors are called on by the banks to honor their guarantee on consolidation loans. We have seen people have to claim bankruptcy protection because of loans they co-signed for their friends and family.

If you pay out all your credit cards with a consolidation loan, it is unlikely that you will be required to destroy or return your credit cards to the credit card companies. In fact, they will be so pleased that you have paid their bill that they will likely increase your credit limit!

Be careful. Credit is not income and you will have to repay the new debt. If you need credit to survive and make the payments on your consolidation loan, you should not have chosen a consolidation loan to deal with your debts. We recommend that your credit cards be safely locked away until after you have paid your consolidation loan back to the lending institution in full.

Advantages and Disadvantages of Consolidation Loans

Advantages:

• May be able to get an interest rate lower than most credit card rates.
• Repayment means avoiding bankruptcy or Orderly Payment of Debts.
• Credit rating may not be affected much if your creditors have not started collection action.
• Terms of repayment may be more manageable and monthly payments could be lower.
• It is easier to make one monthly payment than a series of payments.
• Since there is only one creditor, it is easy to keep track of payment commitments on the new loan.

Disadvantages:

• You could be locked into the loan. If you decide to pay out the loan there could be significant prepayment penalties.
• It is likely that the new financial source will require you to get a co-signor for the new loan. If for any reason you cannot pay the loan, the person who co-signed the loan will have to make your payments.
• The financial institution may require that you pledge your assets to secure repayment of their loans. The assets that they ask for security may not normally be available to them. With security against these assets, the financial institution will be able to seize and sell your assets.
• If you do not have the ability to borrow sufficient funds to retire all your creditors, the creditors who do not get paid out will be able to proceed against you.
• If you have a bad credit rating before getting the consolidation loan, your credit file will show your bad credit history long after the debts have been paid from the consolidation loan.
• The interest rates may be higher than OPD (5%) or proposals (interest free).