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4 Pitfalls Of Debt Consolidation Loans

When you are considering consolidating your multiple debts, one of the first options that come to mind is to use a loan. Although debt consolidation could also mean debt management or balance transfer, it is defined by Investopedia.com as “the act of combining several loans or liabilities into one loan.” That refers mainly to debt consolidation loans.

That simply means you, as the debtor, will take out a master loan that is enough to cover your multiple credit obligations. The goal is one of two things: a simple payment plan or a lower monthly contribution cause by either a lower interest rate or a longer payment period.

In most cases, people who have no idea what debt relief is all about immediately consider this process as a viable solution. It seems like the logical way to put some order into a seemingly difficult debt situation.

4 risks of using a loan to consolidate debt

burning house of cashBut while debt consolidation is a great option to get out of debt but there are a couple of pitfalls that you need to think about. It is proven that debt consolidation loans can fix your multiple problems with debt but you have to take note of these 4 risks.

  1. False sense that you have solved the credit situation. When you get your loan, your next task is to pay for your multiple debt obligations. After all, that is how you consolidate your debt. However, some people get the false sense that they already paid off their debts. When you think about it, you only shifted your debts around. The money that you used to pay for the multiple credit account is still debt. You have to pay that back. Unless you have to paid for the debt, you should not feel that you have already solved your credit problem.

  2. Opting for a high interest rate loan. When you use debt consolidation loans, you have to target a low interest rate. If you cannot do this, you will end up paying more in the long run – as compared to getting a lower rate. It defeats the purpose of using this type of debt solution as it will not make your situation better. It could simplify your debt payment but it will not really save you any money.

  3. Endangering your personal assets. For people who do not have a good credit score to qualify for a low interest rate, they opt to put their personal assets on the line to get a secured loan. While this will guarantee the low rate, it will endanger their homes, cars or other valuable assets. If they cannot pay off the loan, the lender could get these collateral as alternative payments.

  4. Temptation to get more credit. Most of the time, the multiple accounts that you are paying off immediately are credit card accounts. Once you have paid this off with the loan, the temptation to use them again will be very high. You should not give in to this urge because you still owe the same amount of debt. It is just consolidated under one lender.

If you really want to use debt consolidation loans as your means to get out of debt, you have to be very careful of these pitfalls. When you know the risks, you can plan your debt solution to try to avoid them.

How to avoid the pitfalls of credit consolidation loans

Now that you know what you should avoid, you can construct your plans so that you can make this debt solution effective. Here are three things that you can do to guarantee success.

  • Create a debt payment plan. The pitfall that this will address is the first and the last. You want to make sure that you have a plan for the payment of the master loan. This plan will keep you from forgetting that your debt is still technically, not paid. This plan can also help you gain direction on your quest for debt freedom.

  • Check your loan options. It is very important to choose the type of loan that you will get. For instance, you have unsecured or secured loans. You also have peer to peer lending or family loans as your option. These all have their pros and cons and you can make a smart choice about your debt solution if you know your options.

  • Know if you qualify. If you do not have a good credit score or a collateral to make your loan interest rate low, you need to reconsider if this is the right debt solution for you. There are other options like debt management that will not require you to have a good credit score or a collateral. But you can still benefit from the single payment scheme and lower monthly contribution of debt consolidation.

Like all debt solutions, debt consolidation loans can only be effective if you know how to treat it properly. You want to make sure that you understand the processes and rules so you can maximize the benefits that will help you gain faster debt freedom. Not only that, you want to be able to know the tools that will make the journey bearable. Go on a road to self education. You need to start learning how to manage your money properly. That is how you can really move past your debt crisis.

3-Part Process Of Debt Consolidation Loan

two men applying for a loanIf you want to consolidate debt on your own, one of the obvious ways to do that is through debt consolidation loan. Sometimes, people do not really need professional help or debt reduction. All they need is a restructured payment plan that will make it easier for them to pay down their debts without supervision.

However, you have to be warned that not everyone who goes through debt consolidation loan is successful. There are many reasons to this and instead of identifying them, we will give you the solution instead. It all comes down to how you implement this debt relief program.

Debt consolidation loan goes through 3 distinct parts. The problem with some people is they skip some parts or pay less attention to the others. This is a mistake. You have to go through each part completely so make sure that you have all the bases covered in debt consolidation loan.

Part 1: Pre-debt consolidation loan preparations

The first part of the debt consolidation loan process happens just before you make the loan application. This is actually what most people skip or breeze through. They fail to analyze carefully if this debt solution is indeed the right way to solve their problems. If you make this mistake, it could be one of the reasons why you will fail in this debt relief program. So try not to skip through this step and take your time in considering your options.

Here are the three important steps in the first part of debt consolidation loan.

  1. Analyze your debts. This analysis is not really to determine if your debt qualifies for this debt relief program. This is one of the debt solutions that can take on almost all types of credit accounts. However, you need to consider any prepayment penalties that some of your debts may have.

  2. Make a budget and payment plan. Some people will only work on a budget or a payment plan. We suggest that you do both. The budget plan will help ensure that you have funds for the loan that you will make. The payment plan will identify the debts that you will pay off with the loan.

  3. Do the math. The last step in this part is making the necessary calculations that will help you determine if your finances can really afford this debt relief program. If it turns out that you cannot, you may have to opt for a different debt solution – like those that will give you a debt reduction. This should be easy to do because there are debt consolidation calculators online – like those from Bankrate.com or Money.MSN.com.

Only when you have gone through these steps should you continue on to the next part of debt consolidation loan.

Part 2: Going through the loan application process

The second part is going through the whole loan application process. If part 1 convinces you that debt consolidation loan is the right debt solution, then you can proceed to the following steps.

  1. Know the type of loan that you will borrow. Your goal in debt consolidation loan is to find a low interest loan that will replace the high interest ones that you owe. This means you need to know the different type of loans that you can get. You can opt for personal loans, secured loans or peer to peer lending. Make sure you end up with a loan that you qualify for and you have the best chances of paying off.

  2. Look for the right lender. Even as you search for the right loan, you will notice that there are also several lending institutions that you need to choose from. When you know the loan that you will borrow, look for a lender that will give you the best debt consolidation loan rates and terms. You can call lenders or compare their rates online.

  3. Find out the requirements. When you have the prospect lender, find out the requirements for the loan and prepare the documents. Complete the application form and submit it to the lender.

  4. Be ready with the loan costs. When you get a loan, it usually comes with certain costs because the lender will incur them when they check your credit worthiness. All of these will have to be paid too.

Be careful when you make your selection. Make sure you select the loan from a lender that will give you the most ideal payment plan that will make it easier for you to pay down your debts. When you have accomplished these, only then can you proceed to part 3.

Part 3: Consolidating debts with the approved loan amount

The last part is also the phase in debt consolidation that some people do not take seriously. This is actually where most of the pitfalls of this debt solution happens. Ensure that you will follow everything that we will discuss in this part. It all begins when the loan is released to you by the lender.

  1. Pay off your debts as planned. As soon as you get the loan amount, use it to pay off the debts indicated in your payment plan. This is important because holding on to the money for long will tempt you to use it on something else.

  2. Create a payment plan for the one loan you will make. This plan will help you monitor when payments are made and the progress that you have accomplished. It is important to keep yourself from being late on payments so your credit score improves as you pay down your debts.

  3. Stop accumulating debts. One of the downfalls of debt consolidation loan is the temptation to use the recently paid credit cards. Most of the time, people will think that their debts were not as bad as before and they end up falling back on their debt habits once more. Do not let this happen and keep a tight rein on your spending habits.

These are the processes involved in debt consolidation loan. Follow them strictly so you can achieve debt freedom through debt consolidation loan.

On a last note, we encourage you to use National Debt Relief’s Debt Consolidation Professional Plan to help you understand if your unique financial situation will benefit best from debt consolidation loan.

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