Five Common Debt Consolidation Loan Mistakes
- A debt consolidation loan can cause more harm than good, if you make one of these mistakes.
- Don't repeat the same behavior that built up your debt.
- Have a long-term plan in place during the time you pay off your debt consolidation loan.
Avoid These Common Debt Consolidation Loan Traps
Consumer debt in the USA continues to grow, closing in on $14 trillion dollars, as 2018 comes to a close. Consumer debt has increased every quarter for the past 4 years, according to the New York Fed. No surprise, a lot of Americans are struggling with debt.
If your debts are growing, or they have reached the point where they are out of control, it is smart to look for a debt solution.
You may have already narrowed down your debt relief options and decided that a loan for debt consolidation is your best option. Before you begin to review lenders or debt relief companies that can help, here are a few common debt consolidation loan mistakes to avoid.
Not Understanding the True Costs and Duration of Your Loan
Debt consolidation loans are, obviously, not free money. It makes sense to take out a debt consolidation loan if it can save you money overall. When you calculate the benefit of loan consolidation be sure you pay attention to any fees you pay, the size and affordability of your monthly payment, and how many payments you are required to make.
You will need to compare the total amount of interest you are paying on your current debts and how long they will take to repay at your current rate of payment. Compare the two options carefully, so it is clear that you will benefit from the loan.
If you have not read and understood the fine print before you sign the loan, you are making the most common mistake. Be sure you know: costs, terms, how the result compares to others solutions, as well as understanding negative consequences you may face if you don’t make payments as agreed.
Not Researching the Company You Choose
The term "debt consolidation" can be confusing. When comparing companies, make sure you are comparing apples to apples. Banks, Credit Unions, or online lenders offer debt consolidation loans. That is different from for-profit or non-profit debt consolidation companies. They don’t offer loans and their solution likely will have a smaller monthly payment, but it is an entirely different product.
Whatever solution you choose, check out the company’s history. It only takes a moment to do a quick search about a company, using the name of the company and the word "reviews" or "complaints. You can also check the Better Business Bureau or the state agency in charge of regulating the business in your state. A very small amount of time spent in research can protect you from scams and save you a huge headache.
Not Changing Your Spending Habits After Getting a Debt Consolidation Loan
The point of taking out a debt consolidation loan is to get control of your finances and get of debt. However, if you don’t analyze your spending to understand what got you into debt, you’re likely to compound your debt problem. You will end up with new debt on your credit cards and a loan payment!
Begin the process of budgeting by listing your income from all sources. Then list your fixed, mandatory expenses, like rent/mortgage, car payment, utilities, medical expenses etc. Finally, list your discretionary spending, such as entertainment, eating out, clothing, etc. Have the courage to make cuts where they need to be made and to limit yourself on discretionary indulgences which made your problems worse.
Use the Bills.com Savings Machine to see how a simple Starbucks latte a day, at around $4.65 adds up to a monthly expense of 130.00, or 1,562.40 a year. You may have other items like this. Make changes, so your debt consolidation loan is not a wasted effort.
Not Having a Long-term Plan
A debt consolidation loan generally results in a high,er monthly payment than you were paying on the debts you consolidated. That’s because debt consolidation loans require you to pay off the principal and interest in 2-5 years, compared to credit cards which will let you pay a small minimum payment each month.
Put yourself in the best long-term position by thinking how you can use your monthly loan payment on our consolidation loan once you pay off the loan. Not only will this help you form a smart plan, but understanding that a good result is going to come your way if you just keep doing what it takes to pay off your loan. Without a plan, when you pay off the loan, you can easily spend the money frivolously. "Extra money" can disappear, like it is sucked away by a vacuum; if you don’t make a plan and stick to it.
Not Making Your Monthly Payments on Time
One of the benefits of a debt consolidation loan is it improves your credit. You pay off credit card debt which improves your credit utilization. Having a mix of different types of accounts boosts your score, too. But, if you don’t make timely payments consistently you will damage your score.
If you know you won’t be able to make your payment, call your lender right away, Explain your situation and try to work out a solution in advance. If this is the first time you’ve ever had a problem, you have a greater chance of getting flexibility from your lender. A call in advance may get a late-payment fee waived. Remember, your creditor won’t report anything negative to the credit bureau until you are 30-days late, so even if you are late, do what you can go get into good standing before you reach 30-days late.
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Make a Plan and Stick to It
A debt consolidation loan can be a positive step that gets you out of debt at a lower cost and builds your credit. If you plan wisely, it can help you frame your establish good habits that will make achieving your future financial goals easier. Avoiding these 5 common mistakes increases your chances of turning the corner, putting debt behind you, and improving your life.