Should I Get A Debt Consolidation Loan? - YouTube

I'm Doug Hoyes, a Licensed Insolvency Trustee

with Hoyes Michalos and Associates,

and today I want to answer the question,

should I get a debt consolidation loan?

A debt consolidation loan is where you borrow new money to pay off old debt.

The most common example would be:

I owe a bunch of money on a bunch of credit cards;

I get one loan to pay them off.

There’s a bunch of obvious benefits to doing that.

The first one is, well now I have one monthly payment instead of many

so it makes it a lot easier to budget.

And, if I qualify at a lower interest rate,

I now end up with a lower monthly payment.

Obviously, that’s a lot better for my cash flow.

And with a lower interest rate,

I can make the same type of payments and shorten the length of the loan.

So my repayment term is a lot shorter;

that saves me a lot of money.

By getting a consolidation loan, there’s very minimal impact on my credit report.

And in fact, it may actually make my credit score go up

because I've demonstrated my ability to borrow.

All sounds good, right?

Well it is but there are some risks,

particularly if your credit score is less than perfect.

The most obvious risk is:

if you don’t have a great credit score then you may end up

paying a higher interest rate on the loan

than what you are consolidating with before,

and that’s particularly true if you go to

one of these finance companies or high-interest type lenders.

It doesn’t make sense to borrow money at a higher interest rate.

If your credit isn't great,

then there’s always the chance that the lender will say

“Hey, we need a co-signer before we’ll give you this loan.”

Well, if you make all the payments it’s no big deal.

But, if you get behind on the payments and can't pay,

then the lender is now going after your friend or family or whoever’s co-signed it.

That’s probably not a position you want to put them in.

The other risk is that the lender says to you,

“Well your credit isn't great so,

in order to give you this loan or in order to give you a better interest rate,

we need to put a lien on your car or a second mortgage on your house.

We want security.”

OK, again, no big problem if you make all the payments

and that may actually get you a lower interest rate

but now you’ve got the risk

if you don’t pay that might end up losing your home or your car.

By taking the debt consolidation loan

and making the monthly payments as low as possible

you get a lower monthly payment,

but that means the loan period is now longer.

Well, that’s a bit of a risk

because more stuff can go wrong the longer the term of the loan is.

What are the chances that in the next five years

you lose your job, get sick, get divorced and can't pay the loan?

Well, that’s a big risk with a longer-term debt consolidation loan.

The other thing I see happening all the time is,

you get the loan, pay off all your credit cards

but then something happens, my car breaks down,

I need some extra money, I use my credit cards,

and so a year after getting my debt consolidation loan, I've still got the debt consolidation loan

but now all my credit cards are back to where they were before;

I've now got twice as much debt.

That’s a big risk.

So, back to the question, should I get a debt consolidation loan?

Well, if your credit is good enough

and you qualify, at a good rate, it’s affordable

and the risks aren’t that great then yes,

a debt consolidation loan is a great way to save money.

But, if your credit isn't good enough to qualify at a good rate

then you’ve got to look at other options.

And remember, a debt consolidation loan does not reduce your debt.

You’re taking the same amount of debt

and converting it to a debt consolidation loan.

You haven't saved any money.

So, if you don’t qualify for a debt consolidation loan,

the other obvious option to consider is a consumer proposal.

It’s not a loan;

it’s a deal that we negotiate with the people you owe money to.

The interest rate is zero,

and in the vast majority of cases the principal is reduced;

you’re not paying back the full amount.

So that’s a huge cash flow saving.

Now, to find out whether a consumer proposal is right for you,

you’ve got to talk to a Licensed Insolvency Trustee.

We’re the only people licensed by the federal government to do consumer proposals.

We will sit down with you and by law we are required to explain all your options.

To find out more you can go to our website at Hoyes.com

or you can check out all our play lists right here on YouTube.

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