If you find yourself so far in debt that you are considering getting one loan to pay off all or some of your debts, you may want to think again. Using a loan to pay off debts isn’t always the best decision to make, especially if your credit is already suffering. Instead, you might want to consider other options, like negotiating with your creditors or possibly even filing bankruptcy.
Right now, your debts might be incurring the interest rate you originally agreed to when you opened the accounts. Even though your credit score might decrease, you can sometimes keep the original low-interest rates you started with. Interest rates can have an enormous impact on your overall debt. If your credit has suffered and your score is lower, when you apply for a loan, it is going to be at a higher interest rate than you were originally paying. Yes, it may be easier to make one payment instead of making multiple payments. And, this one payment may be lower than all of your other payments combined, but you might actually multiply your debt just because of the higher interest rate. Loans for consumers with poor credit usually carry extremely high-interest rates because of the perceived risk involved.
Risk of Adding Debt
A loan usually just adds to an already overwhelming amount of debt. When you have cash in hand, do you know for sure that you will pay off your debts or will you start considering some of the purchases you have longed for but haven’t been able to afford to until now? If you aren’t careful, a loan could be just one more debt to add to the list and end up causing the situation to become worse. Further, loans can end up costing you more in fees and higher interest rates, which is problematic if you’re already having trouble paying bills.
When a creditor looks at your report, your loan doesn’t have to be noted specifically as a “consolidation loan”. It could just appear as another open account. However, your creditors may see it as a consolidation loan, or they may just see it as another loan that is added to your already struggling credit. In either case, it doesn’t reflect well on your credit and may actually do more harm than good. If it appears as though you are juggling accounts and moving debt from one to the other, this can reflect negatively as well and indicate an increased risk of defaulting on your debt.
Further, if you aren’t able to make your payments on the loan, you have another account on your credit report with a negative payment history which only makes matters worse. Rather than resorting to a quick and expensive loan that can harm your credit more and put you further in debt, it may be best to consider bankruptcy.
Have you used a loan to pay off debt? Share your experience with us in the comments.