Is Loan Consolidation Right For Me?

Posted by William Kain on August 13, 2015 at 9:00 AM
William Kain

debt_consolidation_programsThe first month you are unable to pay your bills, you may feel a little stressed but you assume you will simply catch up next month. The second month you are short on money to pay bills you may feel worse, but it is only a couple of months so you will catch up.  Unfortunately, the more time that passes, the harder it is to catch up on past due bills. This scenario may occur for a number of reasons; a loss of income, even a temporary loss of income, can quickly create a financial crisis.  If you or a family member suddenly becomes ill, the medical bills and lost time from work quickly deplete your savings. What can you do to get out of debt?

Loan Consolidation to Get Out of Debt

A loan consolidation may seem attractive if you are struggling to pay your debts each month.  You may find that the minimum payments on your debts add up to more than you have left over each month after paying your mortgage, car loan, utilities, and living expenses.  If you could lower the monthly payments on your credit cards, personal loans, and other debts, you could afford to pay your bills each month.  Loan consolidation companies offer you a way to do that; however, it does come at a price. 

In a loan consolidation, you borrow money from a lender to pay off your other debts.  By combining your debts into one loan, you can often lower your monthly payment. Having one debt payment each month that is lower than the combined minimum payments on the separate accounts is easier to manage.  In some cases, the interest rate on the loan consolidation is lower than some or all of the individual accounts.  However, loan consolidations have both advantages and disadvantages depending on the person's overall financial situation.

Situations When a Loan Consolidation May Work for You

If the loan consolidation offers a lower monthly payment and a lower interest rate, then a loan consolidation may be right for you if you can afford the payment each month without struggling to pay all of your expenses.

One thing you must be careful to review is the terms of the loan consolidation.  To get a lower monthly payment, the loan consolidation company extends the term of the loan over a longer period of time than most, if not all, of your other debts. Even at a lower interest rate, you may be paying more money over time than if you resolved your debt in another way. Furthermore, you need to pay careful attention to the fees and costs of the loan consolidation. The lender may charge substantial fees and costs for the loan consolidation — some lenders "finance" these costs. This will substantially increase the debt you owe. Instead of resolving your debt problem, you are adding more debt.

Situations When a Loan Consolidation Will Not Work for You

A loan consolidation that requires you to use collateral to secure the loan is never a wise choice to resolve debt. You are taking unsecured debts (i.e. medical bills, credit cards, personal loans, etc.) and turning those debts into a secured debt (i.e. mortgage or equity line).  If you default on the loan consolidation, the lender will foreclose and you will lose your home.  When you are struggling to pay your debts, a loan consolidation may not help you resolve your problem — if you do not have sufficient income to pay your debts now, lumping them into one payment will not change your income problem. There may be a better alternative to resolve your debt problem.

Filing Bankruptcy vs. Loan Consolidation

Before you decide to apply for a loan consolidation, consult with one of our bankruptcy attorneys.  Filing bankruptcy may be a better alternative depending on your financial situation.  You may be able to eliminate most, if not all, of your debts without putting your home, car, and other assets at risk.  By discharging your debts, you get an immediate fresh start without the burden of a loan consolidation hanging over your head for 10, 15, or even 20 years. If you are struggling to pay your debts, a bankruptcy filing can provide you with the relief you need to recover from a financial crisis and rebuild your finances for a better future.

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