Debt Management

Four Signs You Should Consolidate Debt

Drowning in a pile of debt is a stressful way to live. Debt consolidation may help, but there are fees involved and it’s a time-consuming process, so it’s not for everyone. Still, it may help you avoid bankruptcy, and you don’t necessarily have to have good credit to qualify. Examine your individual situation for signs that you should apply for bad credit loans and consolidate your debt.

1. Living Paycheck to Paycheck

If you have so many loans that you can never put any money into savings, and you struggle to pay for necessities, you need a solution that will lower your monthly payments. This will give you time to build up a safety net and to purchase necessities without resorting to credit cards and more debt.

Consolidation may be the answer, if it results in a lower monthly payment. Lower interest rates are a positive as well because they’ll allow you to pay off the debt sooner, but it’s not always what you get with consolidation. Turn to consolidation only if lowering your monthly payment and dealing with one lender instead of several can help uncomplicate your life. This is usually the case with those living from paycheck to paycheck, so it might be worth consideration. 

2. Falling Behind With Payments

Falling behind with your payments as you struggle to stay afloat could be a sign that you need to consolidate your loans. Increasing your debt by relying on credit cards isn’t healthy for your credit score, as failing to pay the minimum amounts can damage your credit score even further, compounding the situation and starting an endless cycle of debt.

Consolidation allows you to work with one lender and only worry about one loan repayment each month. It’s possible the lender will be able to lengthen your payback period, which could mean a lower minimum payment each month. A consolidated loan may also offer a lower interest rate, which means that in the end, you’ll pay less and may become debt-free sooner; however, do expect repaying your debt to take a long time regardless. Still, consolidation may be your only option to avoid bankruptcy and losing your home or car when your paycheck doesn’t stretch far enough.

3. First-Time Consolidation

If you have consolidated in the past and you’re thinking about consolidating again, consolidation may not be the answer. This is especially true if you haven’t finished paying off the previous consolidation. Consolidation impacts your credit score somewhat, and there are fees involved, so it shouldn’t become a frequent occurrence.

Look at consolidation as a one-time solution to help you climb out of insurmountable debt and to learn to live within your means once you’re free of debt. If you’ve never consolidated before, then this is the time to take advantage of this option to get back on your feet.

4. Lenders Won’t Help

Lenders would rather get their money in the long term than have you completely default. For this reason, many of them are willing to work with you in the light of extreme financial difficulties by extending your repayment period to lower your monthly payments, reducing your interest rate or, in rare cases, reducing the amount you owe. Federal loans, such as student loans, are especially likely to qualify for some form of debtor assistance, especially since defaulting on student loans, while damaging to your credit, won’t lead to as severe consequences as defaulting on home or car loans.

If you have spoken to each of your lenders and they won’t offer you any assistance, or the assistance they offer still isn’t enough to make a sizable difference in your living situation, only then should you consider consolidation. Consolidation will let you pay off all these individual loans, potentially lowering your total monthly payment or interest rates and allowing you to deal with only one provider.

Image from Flickr’s Creative Commons

About the Author: Allen Dhawan is a contributing blogger and loan officer for a credit union. He writes frequently for financial websites.

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