There are a few options for resolving your debt problems from simple snowball style balance payments to bankruptcy, and everything in between. One option often considered by those looking to eliminate the financial hardship is debt consolidation. While this option may appear to be an easy solution for resolving multiple debt obligations, it is important to carefully consider how a debt consolidation loan works and how it could apply to your situation.
Pros and Cons
A debt consolidation loan is essentially all of your unsecured debt obligations rolled into one payment each month. The loan servicer pays off your other unsecured debts and rolls all the balances into one larger balance you pay directly each month. This can be an easier solution in comparison to keeping up with multiple payments each month. With only one payment instead of many you reduce your risk of missing a payment and ending up in default. Further, you reduce your overall money lost to interest fees across multiple creditors. For example, rather than pay 7% interest across four different credit accounts, you might pay 10% on just the one consolidation loan. Although the rate is higher than the others, in the end you pay less in interest and could even repay the debt obligation faster.
A debt consolidation loan isn’t an inherently bad idea, but it does have some downfalls. For instance, when you roll all of your other debts into one loan, those other debt balances return to zero. An undisciplined individual may be tempted into using those old, now paid off, credit accounts again running up the balance once more, resulting in more debt. If you were to miss a payment on the debt consolidation loan itself you could end up in worse shape than before. One of the hidden conditions in many debt consolidation loans is a default clause that states severe consequences for missing a payment. You could face a significant interest rate increase, a hit to your credit standing, and even collateral liquidation.
Choosing the right debt relief option isn’t always easy. It is important to contact a Fort Worth bankruptcy lawyer to help you review all of your debt relief options, even those outside of bankruptcy. A qualified lawyer isn’t working to sell you on filing a case, but rather to help you make an educated decision that works for your family.