What comes to mind when you hear the word “Consolidation”? Do you envision all of your debts being ‘paid off’ leaving you with the manageable obligation of one monthly payment? If so, you are thinking about a “Consolidation Loan”. A financial institution loans you money by paying off your debt and you pay them back. With interest, of course.
Nowadays, the word “consolidation” is being used in a much more liberal term. Many debt-relief agencies offer to “consolidate your debt”. The process is quite different. Your creditors are approached and offered a settlement. That settlement could be in full or in part (a percentage of what you owe) and could result in an elimination or reduction of interest.
In the Insolvency Restructuring Profession we call this “consolidation” or “settlement” a Consumer Proposal
So, what is the difference between a “consolidation loan” and a “debt consolidation”?
The most important distinction is the effect on your credit rating or score. A consolidation loan will not affect your score in a negative way and may, in fact, improve it. A debt consolidation, on the other hand, WILL impact your score negatively, the extent depends upon your credit score at the time of the ‘consolidation’.
A friend recently asked me if I could recommend a reputable debt consolidation company that will not impact your credit score. My answer was “Nope, they don’t exist!”. If you find one, let me know!!