Consolidation Loan

For a different perspective on the NB Power deal, we here at NB Conservative would like to switch into allegory mode.

I have friend who is not so good with his money. He has his own business and he tends to spend more than he earns every year. In fact, over the past several years he has accumulated so much debt that he is basically broke.

I like my friend because we think the same way about a lot of things, he's always around when I need some help around the house, and hey, sometimes he spends his money buying me gifts. Who doesn't like that?

I remember one time in particular, when I was out of work and needed a job, my friend was there with a short term contract to help me keep the food on the table for my family.

He's a good friend and I know I can rely on him. Despite the fact he is a terrible money manager.

Recently, my friend came to me and said he had been offered a consolidation loan by his bank (for the sake of argument let's say it was the Bank of Quebec). And he wanted my advice about whether he should take the loan.

When I looked at the deal I was not totally convinced it would be good for my friend. Yes, it would basically take all his bad, high interest debt and put it into one loan where he could make easy regular payments over the next 30 years. That was the good part.

However, some of the other terms of the loan were not so good:

• He was going to have to give up all the equity he had in his house. He could still live there, but now he would be paying rent to the bank.
• The interest rate on the 30 year loan was only fixed for the first five years, after that it could go up by an amount that the bank determined.
• There was a slim chance that the bank would stop doing business in Canada, and if so, that would make my friend's life very complicated.
• It wasn't really clear in the loan agreement what would happen to all his retirement savings and he was really concerned about that aspect of the deal.
• The bank was also going to be deciding where he could spend his money in the future and that was probably going to mean he could no longer shop at the local stores he liked to support in his community.
• And he certainly would not be allowed to support as many people in the community with jobs and contracts anymore.

After considering all those things I still wasn't sure this would be a good option for my friend. But then he threw in one more condition of the loan.

It turns out that not all my friend's money problems were his alone. He had been working in partnership over the years with his Uncle Mervin, who was partly responsible for some of the bad debt that had been accumulating. But now that my friend needed help repaying his debts it appeared that he was on his own. Uncle Mervin refused to co-sign the consolidation loan and my friend was going to have to pay it back all by himself.

So, dear reader, let us ask you this: what advice would you give to our friend?