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Loans are often the bridge that allows you to get from one phase of life to another. Whether you're taking out student loans to get an education or payday loans to get to the next month, the idea is the same: you need money that you don't have, and you need it now.
If you start to fall behind on those loans, though, it doesn't really matter why you took them out in the first place; there will be consequences from your creditors. Your outstanding loan payments can become an enormous emotional and financial burden, leaving you scrambling to figure out what to do.
Even if you're not behind on your payments, holding on to high amounts of debt can still be troubling. That stress increases if you're dealing with multiple creditors.
In either case, you have plenty of options. On one hand, you could try to soldier on, make your payments on time, and pay off your debts the old-fashioned way. On the other hand, you could look into one of the many available methods for making debt easier to deal with.
A popular method is debt consolidation, which could be a godsend. First, think about what could happen if you fall behind on your outstanding debt payments.
What happens if you fall behind on loan payments?
Nobody wants to fall behind on loans, but it happens to almost everyone at some point in life. Strangely enough, most people don't know exactly what happens if they do fall behind (probably because they don't want to think about it). We'll break it down for you as simply as we can.
If you're under 30 days behind, your late payment probably won't affect your credit rating
Your credit rating is shorthand for your overall creditworthiness. It measures whether you're a safe person to lend to. Creditors use it to determine whether to offer you a loan or other form of credit.
Luckily, if you're less than 30 days overdue on your outstanding loan payment, it probably won't affect your credit score. When a payment goes late, your creditor has to go through the trouble of reporting you to the credit bureaus, and it probably won't bother with anything less than 30 days past due.
If you go over 30 days, your late payment could affect your credit rating (for up to seven years)
Once you're late more than 30 days, your creditor will likely report you to the credit bureaus. While one isolated late payment probably won't torpedo your credit score, many late payments over time will definitely do some damage and negatively affect your creditworthiness.
The hit to your credit-worthiness might not affect you immediately, but you can be sure it will come up the next time you try to borrow money, open a credit card, get a loan, or finance a purchase. Even worse, these hits to your credit score may last up to seven years.
You'll likely face a late fee
Most creditors have late fees built into the terms of your debt that automatically accumulate if you miss a payment. In some cases, these can be negligible, but with larger debts such as mortgages, these late fees can be $100 per month or more.
If it is your first time missing a payment, your creditor may be willing to waive the late fee. Regardless, if you are anticipating difficulties paying off your debt, it's worth giving your creditor a call and asking how it can work with you to ease your financial burden.
Your interest rates could rise
On top of late fees, many creditors will also bump up your interest rates if you begin to miss payments. This increase likely means an increase in your minimum monthly payments as well.
This increase in interest rates can be especially brutal if you missed a payment on a credit card with a promotional interest rate. Promo rates are extremely low in order to attract new account holders. When those promotional rates disappear, for whatever reason, the resulting increase can be astronomical.
If you continue not to pay, there could be a variety of long-term repercussions
If your payments remain outstanding, and you don't have a plan in place with your creditors to bring your accounts up to date, a wide variety of repercussions could take place.
Harassment from collections agencies is one of the first signs that you're getting in too deep with your outstanding loan payments. They will send you late notices and call you incessantly, demanding payment.
If you truly can't pay off your loans, bankruptcy may be soon to follow. Bankruptcy proceedings are different for everyone and depend heavily on the type of bankruptcy. With Chapter 11, courts restructure your debts to make them easier to pay. With Chapter 7, the court liquidates your assets to pay off your outstanding debts as much as possible. Neither are fun and both can have a significant negative effect on your credit rating for a long period of time.
What happens on top of all of that depends heavily on the type of loan. With secured loans (such as home and auto loans), you stand a good chance of losing your collateral. With other types of debt, including federal student loan debt, you may have your wages garnished to pay off your debts. Other creditors may just choose to take legal action against you.
How can debt consolidation help with your outstanding loans?
Debt consolidation is one of the most popular methods for dealing with overwhelming outstanding debt. While not designed to be an overnight solution to your money woes, consolidation can definitely make it easier for you to get a handle on your debt and move forward.
While debt consolidation comes in many different forms, the core idea is always the same: you take many debts and turn them into one.
Most commonly, consumers do this with a personal loan. You approach a lender and apply for a new debt consolidation loan that equals the total amount of your outstanding debt. If you gain approval, you then use that loan to pay off all of your debts at once. Then, you focus on paying down that loan, which is easier to keep track of and often comes with a lower interest rate and a lower monthly payment.
Other forms of debt consolidation come at the same problem from different angles.
With balance transfer credit cards, you apply for a new card with a low introductory APR offer attached to it. You use that card to pay off as much of your debt as you can and then try to pay down that card in its entirety before the interest rates go up.
With debt settlement and debt management, you work with a third-party company to manage or eliminate your debts as quickly as possible. These types of companies take a wide variety of approaches, but since you're paying them instead of your various creditors, they often fall under the debt consolidation umbrella.
Regardless of the type of debt consolidation you seek, the outcome should be similar. You only have to deal with a single debt payment each month instead of various minimum monthly payments, and ideally, you'll save money both in the short and long terms. Consolidation doesn't make your debt go away; it just makes your debt more manageable.
Are you ready to pull the trigger on debt consolidation? Slow down. While debt consolidation surely sounds exciting to someone struggling with finances, it has its pros and its cons, just like any other financial decision.
Pros of Debt Consolidation
The pros of debt consolidation are in the definition of the concept. In short: what good things can happen when you reduce your debt into a single monthly payment?
Reducing debt to a single monthly payment equates to reduced stress
One of the main reasons that people seek out debt consolidation isn't that they're struggling to make their payments. The sheer amount of payments that they have to keep up with every month overwhelms them.
Making several different payments per month is an act of financial acrobatics. You have to remember when each payment is due, and then contort your paycheck to make sure that you stay current on all of your bills. Some weeks will be a struggle while others might seem easy, but your financial life will never be as stable as it should be.
On the other hand, when you start to fall behind on your debt payments, dealing with multiple creditors can be an absolute nightmare. They start calling and harassing you, threatening you and demanding to be paid. You end up panicking every time the phone rings. It's not a healthy way to live.
With debt consolidation, all of this unnecessary stress is gone. You have a single, affordable monthly payment to make. It couldn't be easier to manage. Read more about how debt consolidation can save you money!
Reducing interest rates and overall cost of debt equates to more money in your pocket
Ideally, your debt consolidation package will do more than just consolidate your debt. Done right, debt consolidation should ideally reduce your overall interest rates. Reduced interest rates mean that more of your payments go toward eliminating your debt rather than staving off interest, which means you'll pay off your debt sooner and for less money than you would otherwise.
Cons of debt consolidation
While the above pros might sound excellent to someone in debt, remember that debt consolidation can have its downsides as well, especially when you don't approach it correctly.
Bad credit can make getting a consolidation loan nearly impossible
Debt consolidation loans are the most popular method of debt consolidation. How do you get a loan? You apply to a lender, who checks your credit worthiness and decides whether you're a safe person to lend to.
That sounds fine, but remember; the people who need debt consolidation the most are usually the people who are already in dire financial straits. They've missed payments on their debt, flirted with bankruptcy, and struggled to make ends meet for a while before seeking out debt consolidation. All of these circumstances have caused their credit scores to suffer.
When your credit score suffers, it becomes even more difficult to get a loan. In other words, sometimes the people whom debt consolidation would most benefit don't qualify for it.
Fortunately, this is a surmountable obstacle. There are plenty of debt consolidation options for people with bad credit, so if you've been denied for a consolidation loan, don't give up hope.
Consolidating debt doesn't treat underlying issues
This con is the big "but" that's inherent to debt consolidation.
Many people tend to think of debt consolidation as a solution to their debt problems. They consolidate, make their debt manageable, and pay it off fast. Problem solved. Right?
Wrong. Debt consolidation is a tool. It may make your debt easier to deal with, but it doesn't solve the underlying issues that led to you getting into overwhelming outstanding debt in the first place.
Before you seek out debt consolidation, make sure you understand why you ended up in your current financial predicament. Did you spend too much on credit for things you didn't need? Did your lack of savings force you to lean too much on borrowed money to get by?
Debt consolidation gives you the breathing room you need to solve these problems, but you need to solve the underlying issues or risk being in the same predicament a few years down the line.