Quote:
Originally Posted by caiesmommy  Dh and I we're advised by a friend to get our loan's consolidated. And we want to look into it. But we're wondering what can/can not be consolidated? Can you mama's give me a break down/is it a good idea/bad idea
we have
cc debt
student loan
car payment
mortgage
Regular house expenses ect
Help me understand it..and even more so help DH who gets pissy and stressed about $/banks
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I have previously done consumer lending at Canadian financial institutions.
Can't shed any light on another poster's comment that Canada Student Loans cannot be consolidated. . . that may be part of the newer program that I am not familiar with. However, if they are older student loans that were approved by the government but actually lent by a bank, you can consolidate those. This do not, though, automatically mean it's a
good idea to do that. You do get a (fairly minor) income tax credit on part of the interest you pay on the student loans. So your savings of adding the student debt into your consolidation would have to be enough to out-weigh that you would be losing that tax credit. (Because once it's been consolidated, it's not a "student loan" anymore).
As someone else mentioned, consolidating into a home equity plan can be great if you have equity available in your house versus the existing mortgage. That option will definitely get you the best rate (for example, Prime + 1.0%).
Consolidating in a car loan where the car has a lien against it is not necessarily a problem, so I somewhat disagree with that earlier comment. In those cases, we simply used to just sign the car on as collateral on the new loan. The likelihood of doing this depends on where all the financing is right now. If your primary financial institution already has all these debts, it's good for them in a way: The previously unsecured credit card debt now has a vehicle securing it because it's all been rolled into the consolidation loan. Or, if you have the car loan elsewhere, your FI may look at it as an opportunity to get security against the debts you have with them, assuming that right now they have nothing securing your student loan and your credit cards. However, if a bank has
only your car loan (with car as collateral) they may not be too excited about taking on a pile of other unsecured debt that other companies are currently holding.
I could give you better suggestions if you would flesh out the info: "Car loan $18,000 on car worth $15,000 at FI #1. . . credit card $6,000 at FI #2. . . "
Whether it is
worth consolidating depends on the balances of your various debts. You might find that the interest rate on your car loan is going up, but the credit cards are going down. Depending which balances are bigger and how much the change in rate is determines whether you benefit overall on the interest paid. Sometimes you don't benefit on interest savings, but you do the consolidation loan anyway because it's just a way to restructure cash flow and give you some breathing room.
Banks score consolidation loans much tougher than other loans. They are thinking "Here is someone coming back for extra financing help on previous debts" with a bit of caution - even if you've never been late on a loan pymt and have an excellent credit history. There is often little for a bank to take for security versus the amount of the consolidation. Banks are also sometimes less-than-excited about consolidating regular house expenses. If someone came to me with utility bills in arrears and didn't have some logical explanation about a job loss or something, I would be likely to think they were going to be in exactly the same position next winter.
If you cannot get a home equity loan, you should try to just open an unsecured credit line instead. The trick to this is that you have to have the debt servicing room to show you can afford the credit line
and all the loans you have now. And that's the limitation for some people right there. But if you can do this, you will probably get a much better rate on an unsecured personal credit line (at a bank, that is, not at a credit union). Then if you choose to use the credit line to pay out the other debts and close them, that's your business - you were able to show on the application that you could continue to pay it all.
Here's what I mean:
Prime in Canada is around 2.25% right now.
So if you can't get home equity credit at around (2.25% +1.0% = 3.25%) then you might be looking at:
Credit cards: 18-20% (up to 24% if store-issued, or around 11% if bank low-interest cards)
Mortgage: a bit of a wild-card depending when you last renewed and open/closed/variable.
Student Loans: guessing Prime + 2.5% floating = 4.75%
Car loan: 6% (pretty loose guess depending how old it is and if fixed or floating).
You might be able to get a consolidation loan for around Prime + 9% = 11.25%. Or, the unsecured personal credit line rate might be Prime + 3.0% = 5.25%.
On the whole, larger loan amounts get better interest rates (all the same work to approve the application and sign the paperwork, but the bank can make more money on interest).
One last thing: I was always surprised how many members of the public thought "consolidation loan" was just a fancy word for "re-arranging to better suit me" and did not seem to have any inkling that for a bank, this is a somewhat undesirable term and these loans are at higher risk of default. If you are going in for a consolidation loan, I would try to convey a manner (without going overboard) that you realize a consolidation loan is less than ideal. You want to present how this will be an infrequent or one-time solution for you. Not something you plan on doing every 18 months as a regular method of operation.
