Posts Tagged ‘loans’
Beware the word CONSOLIDATION!
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!!
I think credit should come with the above warning. We tend to be overly-optimistic when it comes to using credit. The warning signs are easy to recognize.
- we can afford that loan because I’m getting a raise
- let’s take advantage of that great no-payment-no-interest deal and use our income tax refund to pay it off
- I will buy that living room set on credit and cut back for the next six months and pay it off
The justifications may differ but the results are often the same. Great Intentions lead to less than great outcomes.
- the raise didn’t come through. Worse yet, you were laid off
- your tax refund was half of what you expected
- cutting back was impossible! There was a wedding, the car broke down, etc. Etc.
The diagnosis! – don’t plan future credit commitments on possibilities. Pop a patience pill and make the purchase when the money comes in.