3 Reasons Personal Debt Consolidation Might Not Work for You

Personal debt consolidation companies want to sell their services to everyone. They are paid based on fees or commission, so they will often recommend their strategies to you even if you are not a great candidate. Ask yourself if you are responsible enough to repay debts after consolidation, if you can afford to do so, and if there are any favorable alternatives. Debt consolidation may not work for you if the following is true.

You Are an Irresponsible Borrower

Personal debt consolidation is an option for anyone who has multiple debts. However, people in this tough situation have arrived there for a wide array of reasons. For example, you may be suffering from high amounts of student loans. You had to take the debts to pay for college, and now you have the means to repay the money with your new job. You have managed your debts responsibly, have the means to repay, and now you are a great candidate for consolidation.

By contrast, you may be someone who was simply irresponsible with your debts. You may have taken loans to buy luxury goods, and you may have forgotten or neglected your payments. When you find yourself in debt because you made bad decisions, you may not be a good candidate for consolidation. Consolidation requires fiscal responsibility. It may also require you to make high payments each month. If you cannot afford to do this or are not responsible enough to do this, consolidation may just lead to more debt for you.

You Have Bad Credit or a Low Income

Consolidation requires you to take a new loan to pay off a number of existing loans. Therefore, it will work only if you can qualify for this new loan. Consolidation lenders have lower credit standards than many lenders, but they do not give loans to just anyone. You must show that you can repay the debts on time, either by presenting a positive credit report or a high income. If you do not have a good credit score, you may be offered a consolidation loan with very unfavorable terms. In the end, you will not save money through consolidating debts to a high interest loan. Therefore, debt consolidation works best for individuals who are good borrowing candidates today even if they were not in the past. 

Alternatives May Work Better for You

Consolidate your debts only after exploring other options. These options include direct modification or payment workouts with your existing lenders. If you can establish this type of plan to save your credit and avoid default, you will be more likely to build back your credit quickly. On the other hand, if you do not qualify for these alternatives, it may be time to consider bankruptcy. Individuals who qualify for bankruptcy should consider it a viable option to reduce a debt burden. If you qualify, speak with an attorney regarding what the protection could provide you. You may find out that, despite its negative reputation, bankruptcy is actually a much more favorable option than consolidation.

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