I used to be an enthusiastic supporter of debt consolidation for anyone that could afford to repay their debts in full. The concept is understandable – take all of your high interest, high minimum payment debts, things like credit cards and unsecured loans and lines of credit, and pool them all together into one big debt consolidation loan with a lower interest rate and a lower monthly payment.
The difficulty lies in actually qualifying.
Affordable debt consolidation loans are very difficult to come by. Lenders are not overly enthusiastic to grant loans to pay off debts to other lenders.
Most banks will allow you to partially consolidate debts you owe to them. They will allow you to pool all of your debts to their bank into one loan or line of credit, preferably with new collateral for the loan. In effect, they will pay off your credit card, line of credit and loan that you have with their bank into a new consolidated loan, but they will ask you to pledge your house or something else you own as security for the loan. This protects the bank in that if you are unable to pay they can now try and sell whatever you pledged as collateral.
There are debt consolidation lenders who will provide you with new credit to pay off outstanding loans and bills owing to other lenders. These forms of debt consolidation come at a high costs. They can carry high interest rates, up-front fees and other heavy payment penalties.
A partial or full debt consolidation may still be a good idea for you, but you need to carefully review all of your debts and payments to make sure the relief you get will actually solve your financial problems. If after giving the bank a second mortgage on your house you are still going to be in trouble then why would you bother?
Before you commit to any debt consolidation program make sure you consider all of your options and your monthly budget in detail.
If you have enough debts that you are looking for options to lower your monthly payments to a level you can afford, a consumer proposal is a great alternative to debt consolidation. You will still end up with one monthly payment and your payment will likely be lower than it would be with a debt consolidation. In addition, you won’t be trading new debt for old. You will be getting out of debt as part of the process.
If a person has the amount of debt in a TFSA, would that help to secure a consolidation loan?
I am a senior and I live off my pensions.
Thanks Patricia
It should, but perhaps you should just use the TFSA funds to pay off the debt and then start saving again with the payments you would have had to make if you took out the loan… I know it is nice to have the savings available “just in case”, but if your TFSA is used as security for a loan then you won’t be able to use those funds without paying off the loan first anyway.