When you are facing an outstanding loan situation, debt relief options such as debt consolidation loans can appear as a savior in the times of trouble. Debt consolidation loan is one of the best solutions a borrower can get while being drowned in a pool of enormous debt.
Although there are other debt coverage alternatives available in the market, securing a debt consolidation loan is the first choice for most borrowers and that too for many good reasons. There are lots of benefits of securing a debt consolidation loan that makes managing and paying off multiple loans easy and smooth.
What happens in a debt consolidation loan is that you get a lump sum amount of money equivalent to the estimated amount of all your loans in the market that you have procured from different creditors.
Not only you get to pay all your creditors, but you also get a single monthly loan payment at a much lower rate of interest. However, just like any other loans and debt relief options, if you are not able to keep an eye on the pitfalls, you will not be able to enjoy the benefits of debt consolidation.
With that being said, take a look at the common mistakes that you should bear in mind and avoid when securing a debt consolidation loan:
You Overlook the Root Causes
More and more people are turning to debt consolidation loans because of the drainage of their financial reserves. Their monthly expenditures are crossing the limits and they are not competent enough to manage the repercussions. Being mindful of your situation is good, but it does not help you if you fail to address the root causes of your financial and debt problem.
This directly means if you are not thinking how your lifestyle pushed you into a debt situation, securing a debt consolidation loan will not be of a long-term help, as you will again get sunk into outstanding loans. Debts do not happen overnight and if you fail to understand the main leading causes of this issue, you can never actually get out of the situation.
Key Solution: First of all, do not mourn what happened in the past and try to see the future and what you can do to correct your previous mistakes. For this, you can take professional assistance from a credit counselor or financial advisor who can help you in identifying and rectifying your mistakes. This involves the reduction of overspending on luxury and keeping an eye on the monthly expenditures.
Not Having a Firm Understanding of the Options
When it comes to debt relief options, debt settlement and debt management are the other two alternatives in the financial market. However, each option has its own share of pros and cons, and the same goes for debt consolidation as well.
Although the incredible number of benefits easily overshadows the drawbacks of consolidating your debts, you still need to understand your consolidation options thoroughly. Whether it is debt settlement or debt consolidation, not being able to understand the terms of the debt relief option can get you into further trouble.
Key Solution: You should be proactive when looking for the best debt consolidation loan plan in the market. For this, you can take the help of the Internet and find out what makes a debt consolidation firm reliable and professional. Create a list of the top companies and check their websites for further information regarding the terms and conditions of consolidating the existing loans with a new one. Also, check their fees and whether they charge it upfront or not.
Consolidating the Wrong Debts
There are cases where borrowers have combined all of their debts with the help of a debt consolidation loan. This is absolutely a wrong approach since you need to clear off the loans at higher rates of interest first and then pay other loans. Also, for student loans, you cannot consolidate all your debts at once and pay the creditors, as the option can only be availed when you are already found to be defaulting in your debt payments.
Key Solution: Understand the difference between secured and unsecured loans before consolidating your debts and paying off multiple creditors. Pay off the unsecured loans along with the ones that possess a higher interest rate and then go for the low-interest ones, as well as, the secured loans.
Picking the Wrong Company
The debt consolidation industry is often criticized because of some firms that practice wrong tactics such as taking a lifetime to negotiate with the creditors and making the payments. This can have a negative impact on your credit score. Having a good or at least a decent credit rating is necessary in order to be eligible and procure loans at lower interest rates.
Apart from that, another practice that used to take place a few years ago was charging the consumers an upfront fee. However, the Federal Trade Commission has strict laws against such malpractices, so when you look for a debt consolidation firm in the market, research their fees and remuneration policies carefully.
Key Solution: Besides conducting a deep-rooted research on debt consolidation industry in order to find the right firm to work with, you can also take the help of Better Business Bureau for getting an access to the insights of debt consolidation firms. Go through the reviews and testimonials present on the company website.
Not Creating a Fresh Budget Plan
Most people blindly pay off their debts without putting an action plan in the application. What is the point in consolidating your debts and then again spending too much every month without having any track of it?
Simply seeking the help of a professional firm and acquiring a debt consolidation loan for paying off your existing debts will not provide a long-term solution. If you keep using your credit cards and carry balances on different cards, there will again be a debt problem.
Key Solution: The best solution to move forward with debt consolidation is creating a new budget. Make sure that your budget involves your income and expenditure along with the savings goals.
Securing a debt consolidation loan should be a stress-reliever to your major financial issues. Stick to the above-mentioned key solutions and easily avoid the traps that come with the procurement of a debt consolidation loan.