What Is Debt Consolidation?
Life is unpredictable. Many borrowers can find themselves in debt from a personal loan, auto loan, credit card debt, or student loans. Keeping up with the payments and balances can prove to be a difficult task. Debt consolidation loans can be an option to help consolidate debt, but it isn’t always the best option. You may be wondering, “Is debt consolidation a good idea?” This blog answers that question and provides a better alternative to a debt consolidation loan.
Debt consolidation involves paying off multiple debts with a new loan or balancing credit cards at a rate of interest that is lower than you are currently paying. The process of consolidating debt with a personal loan means using the money to pay off each individual loan. Kentucky debt consolidation will roll all your debts into one monthly payment.
Debt consolidation lenders offer a specialized debt consolidation loan. You may qualify for a personal loan or a debt consolidation loan. Some lenders pay off your current loans while others give you the money so that you can make the on time payments yourself. Getting a debt consolidation loan with bad credit, however, can be difficult.
Below, you can read more about debt consolidation and debt consolidation loans. The information below will give you a better idea of your options to pay off your debt and become debt free. At O’Bryan Law Offices, we understand that many debtors want to explore their options. Although debt consolidation is one option, bankruptcy is a much better option. To explore how bankruptcy can help you overcome crushing debt, call our office at 502-339-0222 to schedule a free consultation with us.
Pros and Cons of Debt Consolidation
When you are overwhelmed with debt it can be stressful. Companies may begin calling you to ensure they are receiving your payments on time. Many people will start to look at debt consolidation to put all their bills into one payment with only one payment to manage.
It can sound like a dream to only have one payment, but there are pros and cons to debt consolidation. A debt settlement company may lead you to believe that the process is easy, but that isn’t always the case. Sometimes debt consolidation can lead to more debt and a loss of revolving credit. It’s important to take in all of the advice from the attorneys at O’Bryan Law Offices to make the best choice for your situation. We can help you determine whether or not a debt consolidation loan is right for you.
Benefits of Debt Consolidation
There are benefits that occur during debt consolidation. Most debt consolidation loans are fixed interest and payments never change. With this loan, you would always know what your monthly payment will be.
Debt consolidation can help streamline your financial situation. It can also reduce your monthly bills and help you save money for emergency cases should they arise. When you have more income available it can help you with revolving credit lenders.
Lowering your interest rate is the best way to save money. When you pay off your debt earlier, you are cutting out the extra interest that you would have paid. On average, interest payments and fees add $120 billion to Americans’ debt each year.
Possibly Lower Interest Rates
Debt consolidation is sometimes a smart idea if you have more than one loan that has high interest. If you’re able to qualify for a new loan or line of credit with a lower interest rate than your current creditors are charging, this can help considerably. By consolidating your debt, you can lower the interest rate. That will help you pay off what you owe quicker.
Might Lower Your Monthly Payments
Debt consolidation reduces the interest rate on your debt and lowers monthly payments. When your interest rate is lowered you can save money each month. One payment will help you lower your monthly payments by spreading your debt out over a longer period of time.
Many families struggle to keep up with numerous debts to many different companies. If they do not have the auto pay option for their monthly payment they may forget to pay on time. This results in late fees and added costs to the bill. If this occurs for more than one bill it can eat away at their budget. Most people have an allotted amount for their bills and other expenses. If they have to pay a late fee it can cause more hardship and debt.
Reduce Your Number of Payments
On average an adult has at least ten monthly payments. That is a lot of deadlines to remember and missing payments will affect your credit score. With a debt consolidation loan you can reduce your monthly payments.
Less monthly payments will help you keep track of your monthly bills. You will be able to make a monthly budget for your finances. You also will have a better idea of how fast you can pay off your debt.
Could Improve Your Credit Score
A consolidation loan may help your credit score. When paying off the loan’s principal sooner, you can keep interest payments low. This can make you more likely to be approved by a credit card issuer with better terms.
Paying off credit card balances can reduce the credit utilization rate that shows in your credit report. You should try to keep it below 30%. It’s important for you to make on-time payments and pay off the loan to improve your score over time.
Downsides of Debt Consolidation
When you pay back consolidation loans you aren’t just paying back the amount that you borrowed. Interest will be tacked onto it as well. To make a debt consolidation worthwhile it needs to be the same or less than you would pay on your current debts.
Debt consolidation can harm credit scores and ruin your relationship with your existing creditors. Many debt settlement companies will collect your payments and hold the money until you have paid their portion of fees. In this time your existing debt will be neglected.
Companies that you owe do not have to accept the offer that the debt settlement company offers them. They can send your debt to collections and harm your credit score. Companies can also try to garnish your wages or sue you for the amount that you owe.
The IRS may also consider the debt that you were forgiven of as income. You may then have to pay taxes on the amount that the creditor writes off. This can cause a financial situation that you were not prepared for and add more debt to your name.
You May End Up Paying More Than You Originally Owed
Taking out a debt consolidation loan may add on additional fees. They can include origination fees, balance transfer fees, closing costs and annual fees. Each company is different so it’s important to shop around and read all of the fine print.
Sometimes the low rate for debt consolidation loans may be temporary rates that are only good for a short time. After that your lender may increase the interest rate. If you miss a payment they may increase the interest rate. You may also lose the grace period that many companies offer.
Your monthly payment may end up lower but it could increase how long it takes to pay your debts. This may result in paying more than if you had paid on your original payment agreement.
Possibly Higher Interest Rates
If you have bad credit, you can still get a loan or credit card to consolidate your debt, but it may not have a better interest rate than your current debt. Your credit score may not be high enough to access competitive rates. You could be stuck with a rate that is higher than your current loans.
Even if your interest rate goes down when consolidating, you could still pay more in interest over the life of the new loan. When you consolidate debt the timeline for repayment starts from then and can even take seven years to pay off. Higher interest rates will cause you to pay more for the debt than what you originally owed.
Higher Risk if You Miss Payments
Being late on payments after you have gone into debt consolidation can be dangerous. If you put up collateral for the debt consolidation loan you may end up losing your collateral.
Your credit score will be damaged if you miss a payment on your debt consolidation. You will already have late payments showing on your history if the company you choose holds back payments that you give them. This can take a long time to recover from and cause you to be denied for loans.
Doesn’t Solve Your Underlying Financial Problems
Taking on new debt to pay off old debt will not solve your problems when it comes to finances. You need to change your spending habits in order to succeed in fixing your credit and budget.
The loans you take out to consolidate your debt could end up costing you more in fees and interest costs than if you had just paid your previous payments. If your debt has affected your credit score you won’t be able to get low interest rates on your current debt.
No Legal Protections
With debt consolidation you do not have a guarantee that creditors will accept the offer that the debt settlement company offers them. You may pay the company to help lower your monthly payments only to acquire more late fees and even garnished wages.
Does Debt Consolidation Hurt Your Credit Score?
Debt consolidation can negatively impact your credit score. Each time that you open a new loan your credit score will dip. When a company does a check on your credit, your score may decrease a few points. If you apply for multiple loans to find the best rate you can reduce your credit score with each inquiry.
If you decide to consolidate your debt through a credit card transfer you can cause your credit utilization to change. Your credit utilization ratio is the percentage of available credit that you’re using at any time. If your credit utilization ratio moves higher after debt consolidation, it could negatively impact your credit score.
Many people will choose to hire a debt settlement company to consolidate their debt for them. These companies may instruct you to stop your monthly payment to existing creditors. When you stop payments you will cause damage to your credit score that can take a long time to fix. Missing just one payment while negotiating a settlement may cause a loss of a hundred points or more from your credit score.
When Is Debt Consolidation a Good Idea?
Debt consolidation can be a smart decision financially under the right conditions but it’s not always the best option. If you have a large amount of debt then it may be a good idea to check into a debt consolidation loan. A smaller debt that can be paid off in less than a year is not a good candidate for debt consolidation.
If you can qualify for a lower interest rate than when you first took out the loans then debt consolidation may be a good idea. It will help you save money and won’t affect your credit score for a long period of time. You will save money on interest costs and fees.
Sometimes you may get a promotion or a new job that will help you pay off your debt faster. If you can cover your new monthly payment and consolidate debt for a lower interest rate then it’s a great idea to pay off your debt faster with debt consolidation. Always remember though that life happens and unexpected events can occur.
Is Bankruptcy a Better Option Than Debt Consolidation?
So many times clients will come to us after trying to settle their debt through consolidation. It sounds like a better option than bankruptcy, but it often isn’t. Debt consolidation will end with more late payments fees and also damage your credit further. The late payments or missing payments will show on your credit history.
You can send a large amount of money to a debt settlement company and never get any results. You can also be sued by the companies that you defaulted on and the settlement company can not stop it.
Companies DO NOT have an obligation to lower your debt or erase it through debt consolidation. They may choose instead to garnish your wages or send your debt to collections.
Why Choose Bankruptcy Over Debt Consolidation?
One of the positives of bankruptcy is that you’ll have protection from creditors who can no longer harass you for payments. Bankruptcy is faster than debt consolidation. Bankruptcy can take four to six months versus years for debt consolidation.
In bankruptcy you will not owe taxes on the debt that is discharged. Unlike consolidation you will not be surprised by taxes that you weren’t prepared to pay. When you owe the IRS it is a serious issue and can also result in late fees and fines.
When you are going through bankruptcy you are protected from garnishments and judgements for much of the process. Unlike in debt consolidation, companies can’t decide not to accept your bankruptcy. Your creditors only receive the assets that can not be protected, which is usually nothing or next to nothing.
Contact a Kentucky Bankruptcy Attorney Today
Bankruptcy is a better option for you than consolidation. Don’t spend years of your life trying to pay off large debts that will end in more debt and heartache. We have worked through many financial situations with our clients and we can do the same for you! You will be in great hands with O’Bryan Law Offices and we can help guide you through the process of bankruptcy. Call us today at 502-339-0222 for a free consultation with our skilled Louisville and Frankfort bankruptcy lawyers.
