Consolidating Your Debt - The Basics
Once you have built a budget and you have determined how much money is left over to service debt you may want to consider obtaining a debt consolidation loan. A debt consolidation loan is when a creditor (usually your bank) takes all of your debt and puts it all together (consolidates) into one single loan. The bank pays out all of the debts owing to each of the creditors and you make a monthly payment to your bank to pay back the money you borrowed (with interest of course).
Before the bank will do something like this they will want to see if you have some type of asset that they can take a security on. This means that if you don’t make the payment on the loan they can take the asset that you pledged as security and sell it to apply the money they receive to the loan (of course you’ll also have to pay any further amounts that are owed on the loan too if the asset doesn’t sell for enough to pay the balance owed).
Sometimes the bank will also ask for a co-signer. The idea of getting a co-signer is so that if you don’t make the payment the bank can go after the co-signer for payment. Co-signing for someone else’s loan is never a great idea, but its an even worse idea when they are getting the loan to consolidate debt. If the bank wants you to get a co-signer (or wants you to be a co-signer for someone else) it means that they are concerned that the loan they are giving is not likely to be paid back by the primary borrower. If the bank is concerned about your ability to pay back the loan they are going to be giving you then you should be too – a consolidation loan might not be right for you. Before you sign a loan like this you should discuss your situation and options with one of our credit counsellors.
Sometimes the bank will only be willing to give you a loan to consolidate the debt that you have with them but not to include all of your other creditors. If this is the case we encourage you to not take the loan – this is more like the bank helping themselves not you.
Whether you decide to accept a consolidation loan or not should depend on how much interest you are paying now and how much in interest you will be saving. Our counsellors have seen so many people end up in situations where they obtained consolidation loans that offered lower monthly payments but at a higher interest rate. Although we were able to help these people it ended up costing them a lot more than what it would have if they had only spoken to us first.
Before you sign on to any consolidation loan we recommend that you speak with a Bromwich & Smith credit counsellor to review all of your options.