Paying off all debts in the smallest amount of time might be the ideal situation, but it is not realistic for the vast majority of people. Instead, a person is more likely to make the minimum payments or even miss payments if he or she has too much debt. People who are in this type of situation may try to avoid bankruptcy by consolidating debt with personal loans, but it may not be as effective as some hope.
Americans now have more than $300 billion in personal loans, which is an 11% increase from 2018. Aside from debt consolidation, Connecticut residents choose to take out personal loans for all kinds of reasons, including home improvement, large purchases and major projects. Personal loans are frequently treated as a better alternative to credit cards, and this can sometimes be true. When a borrower has excellent credit, he or she could get a low interest rate, such as 5%. A borrower with a poor credit rating would be more likely to end up with an interest rate of 30% or even higher.
People with both high and low credit scores often struggle to repay personal loans used for debt consolidation. However, it is much harder for those with lower scores. Condensing all of a person’s debt into one tidy payment probably sounds pretty alluring until the interest rate causes the outstanding balance to move up instead of down. It is also more difficult to come up with the money for one large payment compared with smaller payments spread throughout the month.
There is nothing wrong with trying out new methods for paying off debt. Unfortunately, it is easy to find advice that only applies to a specific group, and interpret it as appropriate for one’s own situation. This means that anyone in Connecticut who was simply trying to do the right thing by consolidating debt could very likely end up in a much worse situation. When this or other debt management strategies fail, it is likely time to look into the benefits of bankruptcy.