After months of stress due to the continuous rise in multiple loans and credit card bills, you decide to consolidate your debt. It seems a good idea as you have to pay down all installments on the larger debt, no more hassle, and torture of multiple repayments on different due dates. Though it seems a big relief, you need to consider various factors before taking the plunge.
Debt consolidation loans are getting more and more popular nowadays as every other person chooses this option to get finances under control and get out of debt. However, this journey is not as easy as it seems. Following are the common mistakes that borrowers make while applying for debt consolidation loans:
Not Knowing The cause of Being In Debt
Many of you think that it is an ideal solution when you have been juggling with various loans as there is no risk of having due dates slipped through the cracks, but this is a myth. Whether you have only one loan or multiple debts, you are going to have debt pressure unless you have a repayment plan. Consolidating loans is not good at all unless you know what has been the cause for falling behind repayments.
- Before you take the plunge, you must look over your incomings and outgoings.
- Try to find out how you got into debt and how you can get out of it.
- Be wary of triggers that drain away money as quickly as anything, for instance, impulsive shopping, reckless use of credit cards, takeaways, etc.
Consolidation loans will never help you if you are not going to turn over a new leaf, ultimately you have to pay back the whole debt out of your pocket.
Grabbing The First Offer Without Research
Once you have made up your mind, you can go ahead, but you need to shop around to get the best deal. Many people just talk to one company and if they feel comfortable, they clinch the deal. You may ignore talking to multiple companies as it is not an easy conversation for everyone. Well, the rule of thumb says that you should do proper research to make sure that you get the best deal. Interest rates and fees vary from company to company. You will not get a better deal if you do not compare.
You must remember that many companies do not allow for consolidation loans if your credit rating is bad, and if they do so, you will end up paying high-interest rates. It is better if you check your credit score before applying for it. If it is not perfect, you have two options: secure your consolidation loan or wait unless you improve your credit standing. If you think that the debt consolidation loan does not fit your budget, you should seek a debt management plan.
Debt consolidation loans can help you release from the stress of multiple debt repayments, but you need to budget to make sure that you do not fall behind payments. It is important that you create a budget to know how much money you spend exactly every month to meet your expenses. Whether you have one small loan or multiple large loans, in both cases you need to cut back on your expenses to have enough money to get out of debt. With the help of budgeting, you will know how much cash is coming in and how much is going out. Look over the trend of your expenses and figure out where you can whittle down. The more you avoid spending, the more savings you will have. Try to avoid making impulsive purchases and reckless use of credit cards.
Consolidating Wrong Types of Loans
If you have been juggling with multiple types of loans, it does not mean that you will consolidate all of them. Experts suggest that you should consolidate high-interest rate loans such as loans for people with bad credit, credit card debt, personal loans, etc. You do not need to consolidate low-interest-rate loans such as student loans as they can be transferred to zero percent credit cards.
The bottom line
If you want to apply for a debt consolidation loan, make sure that you have the repayment plan, you choose the right company that offers the deal at the lower interest rate, and you do not commit aforementioned mistakes.