Personal debt often accumulates slowly. People who cannot pay their balances in full every month may carry over a small balance to the next month. The outstanding balance increases over time until the minimum monthly payments are substantially higher than they used to be.
Eventually, those with high levels of credit card debt and other major monthly financial obligations may start looking for solutions that offer relief from the pressure on their budgets. Debt consolidation loans often look attractive.
However, a debt consolidation loan can easily worsen a person’s financial circumstances.
Consolidation loans can be costly
Many businesses charge fees for providing debt consolidation loans. They may also offer attractive introductory interest rates that then surge to much higher rates after a set amount of time or a late payment.
In some cases, the consolidation process does not require the closure of revolving lines of credit. People may then accrue additional debt beyond what they previously owed by continuing to use their credit cards. All of that can combine to create a very difficult financial situation.
Unlike a consolidation loan, which only changes the creditor and a few other details about the debts a person must pay, bankruptcy is an actual solution. A successful bankruptcy filing results in the discharge of the balance owed.
Filers can potentially discharge credit card balances, personal loans and even medical debts. Bankruptcy can eliminate the legal obligation to repay debts instead of just moving it around.
Learning more about debt solutions and their limitations can help struggling individuals make the best possible financial choices. For many people, debt consolidation loans only offer temporary relief instead of an actual improvement in financial circumstances.