I received the following email from a reader. I'll give my thoughts at the end and I'd like to get your thoughts for the reader.
"So here's the deal. I have bills beginning to pile up. I try to pay one and make good with them, but then others pile up and become more difficult to pay and its getting even worse now. I have a second job as a server, but the pay is getting worse due to summer and people going to the shore. So my idea was, in order to save my credit rating and attempt to not go into bankruptcy all while keeping my car and roof over the wife and kids (my job could actually be at stake if I do file bankruptcy), is to get a personal loan of about 20,000 to consolidate all irregular bills (ie small loan, credit cards and make current on bills that are past due approaching the 60-day mark) and have to just make one payment to the one big loan.
So, the question, do you or your readers recommend either going down that route (the big loan) and/or recommend a loan company I should go with (bank, some online credit company)? I haven't spoken to my bank or other banks just yet, but I have searched around online seeing that there are sites offering 1k-30k personal loans."
My advice, given my own personal situation, is to not consolidate the loans. I tried the same thing when I was trying to get out of credit card debt and it backfired on me. I did not change my behavior so I ended up running up additional debt on the cards I paid off and consolidated. I then had new debt to pay in addition to my old debt.
Withought knowing actual numbers regarding income and expenses, it's hard to offer any other kind of advice on how to handle the debt.
Reader, if you haven't already, I would recommend gathering all of your bills and writing them down. I would then use one of the debt calculators to determine the best method for reducing your debt. If you Google "debt calculators", you will get thousands of results.
What do you think?
I agree. I also tried consolidation and ended up in a worse situation than the original.
Consolidating is not such a bad idea. The big question is will you change your habits. If the bills are more unplanned things like hospital bills or car repair then i'd say go for it.
I do recommend that anyone doing a consolidation loan close any account they pay off. Pay off a credit card then close that account. If you can't afford that account then you don't want it. You can always get a new credit card once you have the loan paid off.
What ever you do make sure you have and are living on a written budget. It is more important than a consolidation loan. With the loan you get a big emotional boost when you pay off and close the accounts but there is little emotional boost during the process. Because of this it is important to make sure you can stay motivated during the process.
A lot of banks don't do unsecured loans anymore due to the state of the economy. My bank (a very, very large national bank) doesn't even do them anymore. The banks want collateral in case you stop paying.
That being said, it wouldn't hurt to check it out. I have a personal loan I used to consolidate debt and I hate it (it's not with the bank I work for). The interest is twice or three times as high as my credit card rates are and I can't refinance the loan because hardly anyone does personal loans anymore. So I am just stuck making extra payments on that personal loan until it's paid off. Hoping to have it paid off next year by throwing huge chunks of money at it since I no longer have a rent payment.
Since you mentioned you're behind on some of your payments, your credit score may also already be affected by this, making it even harder for you to get a personal loan or get one with a reasonable rate.
When I got my personal loan last year, my credit score was near 800, so I was absolutely shocked when I was told what the rate would be.
Be very careful - consolidating debt doesn't fix the underlying problem of overspending.
NO.
Incurring more debt by taking out a loan to pay off old debt is NOT a good idea.
In addition, working with any debt consolidation company will show up on your credit report and hurt your credit rating.
Debt consolidators' basic business model is flawed. They will instruct you to stop paying all those late bills and instead pay into an account they oversee. When enough money accumulates in it, they will take it and offer to negotiate a payoff with your lenders, presumably for less than what you really owe. The problem is, your creditors won't stop coming after you: they will label you as being delinquent and that will certainly hurt your credit.
What's more, debt consolidators take their big fee right at the get-go, before having done anything to improve your situation.
This person should buckle up and figure out a way to cut costs and pay off his debt instead of looking for a quick fix.
The debt consolidation industry is riddled with crooked companies who charge excessive fees and do nothing to help their clients. Here's one of several stories I've written on the subject: http://www.creditfyi.com/Creditpedia/Debt-Consolidation/Debt-Consolidation-Scams.htm
I would recommend going the Consumer Credit Counseling Service (or similar) route. I admit, it's *almost* the last resort. But it does force you to quit using your cards, as CCCS makes you close your accounts. I did this when I had over $20K in credit card debt on 6 or 7 different cards, and the CCCS was able to negotiate lower rates on my behalf. A couple of credit card companies gave me 0% interest while I was paying down my debt with CCCS. Yes, it will ping your credit score, but it sounds like if you're already falling behind on payments, your score is taking a hit anyway.
Just something to think about/look into. I know for me, I wasn't disciplined enough to stop using my cards – and that's the only way you can make any headway in paying off credit card debt.
I agree. I don't think consolidating will solve the issue. Look again at your budget and see if there are expenses that have been overlooked. Start there.
believe consolidation is only for the iron willed Otherwise like you said write to each one individually and try to bargain hard t get a discount off the debts. That usually works. Some companies give up to 50% discount on the debt or freeze the interest.
Not a good idea. It tends to make things worse if not careful.
Kelly
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I have to agree with the other comments: First, the reader may not even be able to GET $20,000 in loans.
Rather than do that, find a reputable credit counseling agency. They can help you contact all your creditors and set up a solution that will mean your creditors are assured of getting their money.