Debt Consolidation

If you are considering borrowing money form a bank, trust company, or credit union to consolidate your existing debts, the following information will assist you in preparing yourself for the interview with the loans officer or representative of the lending company who will determine whether or not your loan will be approved.

Virtually every financial institution has certain "criteria" or "lending conditions" that must be met before a loan can be successfully arranged. Basically, they want to know your:

• Payment Ability
• Available Security
• Record of Pay Habits

This means that you should be prepared to demonstrate your ability to repay the debt by providing the lender with accurate personal financial information. Examples of some documentation you should have on hand are:

• A monthly cash flow statement that shows your net income, minus your expenses, which equals your payback ability (or what's left over).
• An asset and liability statement (what you own and what you owe).
• A recent pay cheque stub or T4 slip (something that verifies your sources of current income).

Make an appointment with your local Credit Bureau to review your credit history. Ensure that the information is correct and if there are any discrepancies, be ready to explain them to the lending institution, prior to their inquiry. By providing complete information to a potential lender, you establish that you have the current financial ability to service the debt and create a favourable financial climate for both yourself and the lender with whom you want to do business.

If you are successful in obtaining a consolidation loan, exercise credit restraint and sound budgeting methods. Refrain from further credit transactions while this loan is outstanding. Since this is a possible solution to your current debt problem, ensure that this is the last loan of this type.

Remember, consolidation loans only pay off other debts. It is not considered a remedy unless it reduces your monthly payments and interest on debt balances. Your need for a consolidation loan is a clear warning signal that you have over-contracted your present ability to repay your creditors.

There are a variety of consumer loans available at most lending institutions and it is best to discuss with the loans representative the loan that is suited to your repayment ability prior to the loan interview, as this figure represents the money you actually have left over each month, and it must be enough to repay the loan. Frequently additional security (collateral) must be pledged against the loan, or you may require a co-signer. Remember, if you are unable to meet the repayment schedule, your co-signer will become responsible for your obligation.

Advantages

Advantages of a consolidation loan:

• An ideal consolidation loan should lower the cumulative interest rate
• If you extend the repayment period, it should reduce your monthly payments
• You should have only one monthly payment
• It should allow you to budget monthly income and expenses more effectively
• It will pay off your existing creditors, thus relieving you of the stress and tension brought about by owing money to numerous creditors.

Disadvantages

Disadvantages of a consolidation loan:

• You may be tempted to continue using your credit cards and other credit privileges that led to the problem in the first place.
• Your spending pattern may not change, since you may now believe that your creditors have been "paid"; or
• You may actually be increasing the cost of your total debts (even though the interest rate charged may be lower, the payback period may be spread out over years instead of months, resulting in higher total interest charges). This would be the case in the event of re-mortgaging or a second mortgage.
• If you are required to pledge additional security against the loan - for example, property - you can not sell this security without the creditor's permission. If you ask a friend or relative to co-sign a loan and you default on the loan, the creditor may demand payment from the co-signer. This can seriously affect your relationship with that person.