Many Americans are currently in a daily struggle with their debt. If you’re one of them, sick and tired of late payments, multiple outstanding loans, possible wage garnishment and constant phone calls from persistent bill collectors, you’re no doubt searching for a viable solution. Consolidation loans may be able to help you.
Keep this in mind before you sign up for a consolidation loan: you’re signing on for a brand new loan. Here’s how it works. A lender will buy the existing amount of your debts and bundle them (for lack of a better term) into one loan. This helps to lighten the burden of debt on many peoples’ shoulders.
There are a myriad of factors that make debt consolidation a nice option. For one, with loans that are owed to multiple sources, keeping track of due dates can be difficult. These due dates can fall in rough spots between paychecks, and you can even miss one bill because you’re concerned with paying another.
Consolidation loans are not a cure-all for these issues. Although your lender may be able to buy out your debt at a good price, there’s a good chance they’ll have to turn it around to you at a higher interest rate. This will depend on your credit history. In other cases, it may be a higher interest rate, but it’s only interest on one payment instead of several. Regardless, there is a price for the convenience of only having one bill.
Having a consolidation loan can also negatively affect your credit score. When examining your credit, there are a lot of factors that credit bureaus will take into account, and one of those is consolidation loans. Bureaus will notice if you haven’t closed some of your accounts (which happened when your lender bought the loans), meaning you’ve consolidated. This just looks bad on you, because it appears you doubled your debt instead of consolidating. Once you’ve damaged your credit score, it’s a tough road to get back into good standing.
If foreclosure or bankruptcy look like they’re on the horizon, it’s probably time to consider a consolidated loan. However, make sure you’ve examined all of your potential options. If there’s a way that you can handle your debt without a consolidated loan, do it. Unless you’re absolutely drowning in your debts, it’s better to try to manage them on your own.
If you do choose the route of consolidation loans, make sure to treat it responsibly. It’s a fresh start. Don’t backslide into the same spending habits that got you into the mess of debt that you have. Pay on time, and pay more than the minimum. This is a great, simple way to rebuild a damaged credit score.
In summary, if there’s another way for you to handle your debt outside of a consolidation loan, it’s best to try to manage it on your own. Consolidation loans may sound like an easy way out, but should be reserved as a last-ditch resort.
I’m a financial consultant specializing in individual voluntary arrangements. Click here for more information.