Debt consolidation loan is probably one of the most controversial among the other debt solutions. The reason for this is it is what most borrowers think of first as a DIY debt relief program but financial experts will not encourage you to do it. Using a debt to cover another debt just seems ridiculous and illogical somehow.
But if you analyze it carefully, there are benefits to it and the structured single payment scheme is more appealing than having to deal with confusing multiple debts. You get to enjoy the following:
lower monthly contribution
longer payment period
lower interest rate
easier single payment plan
paying off the debt while increasing credit ratings
What makes debt consolidation fail?
Although these benefits are usually guaranteed in debt consolidation loan, there are people who fail at this program. There are a couple of reasons why this program can fail a consumer. If you are sure that this is what you want to get out of debt using this method, you need to avoid them.
Here are three of the most popular reasons why you can fail at debt consolidation loan:
If you do not have the right qualifications for it.
There are a couple of qualifications that you need to possess in order for you to enjoy the maximum benefits of debt consolidation loan.
Good credit score. To guarantee a low interest on your loan, you need to have a high credit score so that you can be viewed as a low risk borrowers. In most cases, people with bad credit scores are given a high interest because they have the highest chance of defaulting on their payments.
Collateral. If you do not have a good credit rating, another way to get a low interest is by having a collateral to put up for a secured loan. The lender is guaranteed that in case you default on your payments, they can fall back on your collateral as payment. They do not need to protect themselves by giving you a high interest because that makes you a low risk borrower.
Stable income. There is no debt reduction here so you need to be able to afford paying off the complete balance that you owe. Even if you used the loan to pay off the other debts that you owe, you should remember that you still owe the same amount of money.
If you have the wrong expectations.
As mentioned, there is no debt reduction. Some people make the mistake of thinking that their debts are paid off and solved. That is not true. You only used the loan to pay off your high interest debts. You still have the same debt amount – you just shifted it so you only owe one lender.
Also, some people get frustrated by the slow progress of debt payments. You should expect that because you have lowered your debt contributions every month.
If you do not correct the mistakes that got you in debt.
Another reason to fail at debt consolidation loan is when you fail to correct the mistakes that you made in the past. It can be bad spending habits like overspending. You need to identify what got you in debt in the first place so you can correct and avoid making the same mistake from now on.
It can also be a lack of emergency fund that got you into this mess. The great thing about this debt relief program is the lower monthly payments will free up some of your funds so you can put it in your savings. Growing your emergency fund will help you eliminate the need to borrow money.
Tips to make debt consolidation loan successful
There are many techniques to make debt consolidation loan successful. You need to follow as many of them as it applies to your unique financial situation. Here are a couple of tips that you can implement.
Do the math. Make sure you are really saving money if you go through this program. Use online calculators from Money.com or Bankrate to help you calculate if you are really better off with a debt consolidation loan.
Create a payment plan and follow it strictly. Some people make the mistake of using their loan for something else. Make sure you really pay off what you intended. Not only that, commit to paying this new loan diligently.
Remove the credit card temptation. This is one of the culprits in making debt consolidation loan fail. You have to stop acquiring debt by removing the temptation that credit card have. Now that your have paid them off with the loan, they would have gone back to the zero balance. That is very tempting to use. Do not give in and keep the cards somewhere you cannot access it easily.
- Set financial goals. It helps if you provide yourself with goals that will motivate you to make your monthly payments. That will keep you from defaulting on your obligations and getting yourself into more trouble.