Two wrongs do not make a right. Are you suffering from frugal fatigue? Are you unable to live within your means, thus the high number of accumulated debts? If you are sinking in this boat with an overwhelming number of debts to repay, debt consolidation may be your best way out of the financial crisis.
To avoid filing for bankruptcy, a debt consolidation loan could be just what you need. Debt consolidation means taking a loan to repay all your outstanding debts and/or loans. The new consolidated loan will have a lower interest rate and a manageable monthly repayment system. So, instead of grappling with many loans and outstanding bills, you will have one principal and interest to deal with monthly.
This is a genius debt management solution, right? Well, you aren’t the only one who rushes to this conclusion and unfortunately, if you do not take your time to understand what the loan is and how it works, or how to avoid getting into a similar situation later, consolidation will not resolve your problems.
Before rushing to a financial institution offering debt consolidation loans, read this article to know the mistakes you can avoid so as to benefit from the financial plan you will take. Here is the list of common mistakes:
It may seem like a debt consolidation scheme takes you off the debt leash, but it doesn’t. You ought to remember that debt consolidation is just a financial restructuring tool making it easier for you to manage debt. The debt doesn’t disappear.
The realization that your previously maxed out credit cards are now available for use and actually making the same mistake of buying stuff you cannot afford will only get you back to the financial mess you were in before consolidation. To avoid falling into this trap of reloading your debts, cut out or close your credit cards and keep a very low limit to the necessary card. This can be used for emergencies only.
- Picking the wrong debt management program
Debt consolidation is not the only debt management solution at your disposal. As a consumer, you should research and know your options, which are often overwhelming. Some of the available options include:
Debt settlement: working with a credit counselor, the amount of money you can deposit in an account monthly is determined and the debt settlement company negotiates with your creditors for a lump sum payment settlement.
Credit counseling: often your large accrued debt results from poor spending habits. A credit counselor will work with you to create a budget and develop a payment strategy for the accrued debt.
Bankruptcy: this is often considered the last option for high debts and poor credit. A counselor will recommend the Chapter 7 or Chapter 13 bankruptcy process giving you a fresh start. This stays on your record for up to 10 years.
Default: if you decide not to pay your debts or you just give up on paying, creditors will call and send letters, but eventually you will be taken to court and this can lead to wage garnishment, a lien against a property, or account property.
Debt consolidation: this is among the most effective debt management programs. All your debts are put into one. Old is repaid and you are left with one loan. Debt consolidation meaning is often associated with debt restructuring program that eases the debt repayment burden.
- Paying too much
You will find yourself paying way too much if you do not take the time to research. There are many options and many providers of debt consolidation services. By taking the time to research and talk to financial professionals, you will find yourself paying less in fees, monthly repayment rates, principal, and interest.
Going for the first name you come across isn’t a good strategy because you will end up paying so much if the restructuring fees are high and the APR inapplicable as a result of your poor credit. Take your time and shop around. The cost of fees for the credit counselor could be high as well.
- Falling into scams
There are many predators on the market waiting to hang their fangs in your neck. Currently, debt consolidation is a debt relief program selling like hot cake. However, you should avoid salespersons that strong-arm you to sign up for their services without thinking or researching about their services. Though their rates appear affordable, chances are that there are costs not included in the packages advertised resulting in an expensive debt consolidation loan.
- Failure to stick to the program
The debt consolidation meaning doesn’t include options of not repaying as expected. This will damage your credit score badly and the banks or financial institutions never forget. Once you sign up for the services of a company, take your time and plan your resources well to ensure that you follow through with the program.
To avoid the pressure of dropping off the plan, undertake research on all the upsides and downsides of the program. Ensure that you are 100% eligible for consolidation before signing up.
- Failure to address the real problem
You are not in debt because you woke up and found yourself in debt. The main reason why you are in debt is because of the poor financial decisions you have made. The most important step to make is to change your spending habits.
The lifestyle you lead determines how much you spend and it should also be determined by your spending habits. Learn to live within your means. Create a budget with a savings plan and stick to it.
- Consolidating the wrong debts
Though an attractive program, debt consolidation is suitable for paying off high-interest loans. Unless otherwise, consolidate high-interest debts first and the low interest last. Student loans have low interest rates and can be transferred to a zero percent credit card.
- Working with the wrong professionals
Ensure that whoever you are getting a debt consolidation loan from is certified by the Federal Trade Commission. Check their websites for reviews to know if the company is trustworthy.
In conclusion, though debt consolidation is an effective remedy for debts known to reduce the number of debts repayable monthly, afford you lower monthly rates, and even increase your credit score, you should ensure that the services offered will benefit you. Also, manage your finances before and after getting the debt consolidation loan for financial freedom.