Things to remember when consolidating debts
- What is a debt consolidation loan?
- Things to remember
- Debt consolidation advantages
- Debt consolidation disadvantages
Debt consolidation, what you need to know
Before meeting with a financial institution's loan officer, draw up a complete list of your current debts to determine the total amount of your outstanding debt. You don't have to include all your debts, but it is better to tell the loan officer about them. Since the officer has to look at your credit file in order to make a decision about a consolidation loan, they will have access to all this information anyway. It is best to be completely honest.
Watch consolidation loan interest rates
If the interest rate offered by your financial institution seems too high, don't hesitate to shop around at other financial institutions to try to negotiate a better rate. Some budget/credit counsellors suggest shopping at no more than 3 institutions because "an unusual increase in the number of inquiries can have a negative influence on your credit score" 1. For more information on this topic, please refer to the Credit and Credit Repair section.
Read loan conditions and agreements closely
Be aware that many finance companies offer consolidation loans, but generally charge a higher interest rate compared to a mainstream financial institution. Before entering into any loan agreement, it is critically important to carefully review the terms and conditions (i.e., loan period, interest rate, special terms, fees, etc.) so that you know exactly how much the loan will end up costing you.
Conditions of your consolidation loan may include the following
In most cases, once the loan has been granted, the financial institution will pay off the outstanding debts to your creditors. In some cases, based on your ability to convince the lending institution that you are back on track, you may be able to arrange to pay your creditors yourself directly.
Your financial institution may close credit accounts you have with stores, businesses or credit card issuers to make sure that you don't increase your debts while paying off the consolidation loan.