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3 reasons a consolidation loan isn’t as good as bankruptcy

If you are having trouble with your finances because of medical bills, high expenses, job loss or other issues, you may be wondering if you should try bankruptcy or attempt to consolidate your debts. One of your options might be a Chapter 7 bankruptcy, which would allow you to pay down what you owe by liquidating your nonexempt assets.

The alternative, for some, is to take out a consolidation loan. This loan allows you to put all of your debts onto a single loan, so you make just one payment a month.

Consolidation isn’t for everyone. There are some times when a consolidation loan isn’t as good as bankruptcy. The reality is that:

  1. Consolidation doesn’t eliminate any of the debt you have
  2. Consolidation still leaves you with monthly payments
  3. Consolidation could come with a high interest rate

You need to be cautious if you want to consolidate, because it’s not always in your best interests.

Consolidation doesn’t eliminate any of the debt

Remember that consolidation won’t eliminate any of your debt. Instead, it puts all of the debts onto a new loan. For example, if you have three credit cards at $500, $750 and $400, you can put all of those onto a loan for $1,650 and pay one monthly payment. This could be good, but with bankruptcy, some or all of those debts might be completely eliminated. Then, you wouldn’t pay them at all.

Consolidation still leaves you with monthly payments

Consolidation does still leave you with monthly payments, and they can, in some cases, be higher than what you were paying before. With the above three cards, you might have paid $20, $50, and $10 a month, for example, but the new loan arrangement might speed up how fast you have to pay and request a payment of $137.50 a month (plus interest) to pay it off in 12 months. That would cost you more, which wouldn’t be helpful if you’re trying to free up spending money each month.

Consolidation could come with a high interest rate

One of the biggest issues with debt consolidation when you’re already struggling to pay your bills is that the loan you get may have a high interest rate. The lower your credit score is, the worse that rate is going to be. That rate may be lower than your credit cards in some cases, for example, but in others, the fees and costs of taking out the loan simply are not going to benefit you.

These are three problems you may run into with debt consolidation. Think it over carefully before you decide to apply.