Bankruptcy Facts, Repair Credit after Bankruptcy, Philip Tirone

Question: I am trying to avoid bankruptcy and want to learn about debt consolidation loans. Could a debt consolidation loan help me?

Philip Tirone: Debt consolidation loans are those that marry several loans into just one loan. People who are doing research about bankruptcy facts and trying to avoid bankruptcy often have success using debt consolidation loans. In theory, these loans help a person save money and can stave off bankruptcy. When structured correctly, the payment for the debt consolidation loan is less than the combined total of the individual payments.

Debt consolidation loans work like this:

Imagine that you have eight credit cards and one personal loan. Combined, you are payment $1800 a month to these creditors. If you qualified for a debt consolidation loan, the loan would be used to pay the credit card bills and the personal loan in full. You would now have just one loan, with a balance that is the combined total of the credit card bills and personal loan. But now, you pay only $1200 each month.

If you are fortunate, the interest rate is less as well.

Notice that I said “if” you are fortunate. This is a big “if.” A lot of debt consolidation loans just extend the length of the loan so that your monthly payments are lower, but you pay more over the long run. For instance, perhaps you were going to pay $1800 a month for one year, but then the loans would all be paid off. By getting a debt consolidation loan, you might pay $1200 a month for two years, which means you end up paying $7200 extra with the debt consolidation loan.

Of course, if this helps you avoid bankruptcy, it might be worthwhile.

Another problem with debt consolidation loans is that to receive the lower interest rate, you might need to put up some collateral. This could be dangerous. What happens if you default on the debt consolidation loan, which is using your house as collateral! The bank might be able to foreclose on your home!

Before you start looking into debt consolidation loans, learn how to create a budget. With a little luck, you might be able to save money on your own, without the hassle of applying for another loan. You might also consider getting some help consolidating your credit cards through other mechanisms.