Securing a debt consolidation loan and paying down your obligation can fast-track you to an improved credit rating and financial stability. But success requires personal vigilance and fiscal responsibility.
Needless to say, not everyone trying to consolidate debt achieves their goal of financial freedom. That’s largely due to making one or more of the common mistakes that slow the debt-free process or result in setbacks. If you are considering taking out a debt consolidation loan, it’s imperative not to make financial missteps along the way. These seven rank among the most prevalent and unfortunate errors by borrowers.
1: Not Having a New Budget or Plan for Paying off Your Debt
Using a debt consolidation loan can be a reliable product to turn your high expenses into one manageable monthly payment. The strategy generally lowers the expenses of high monthly credit card interest payments and other money-squandering issues. But consolidation is only a viable long-term solution if you create a budget that accounts for the loan repayment and is realistic about additional expenses. Make a budget before you take out a debt consolidation loan.
2: Taking Out a New Loan at a Higher Rate
A debt consolidation loan only makes good financial sense if it delivers an interest rate that you can afford. It’s not uncommon for people struggling to manage multiple credit cards, auto loans, and living expenses to take the first loan product available for the sake of convenience. However, if the rate is too high and results in larger payments, then you're not saving any money in the long run. Plus, the likelihood of late payments or defaulting increases. That could have a devastating effect on your credit score. Shop around for the most competitive rate possible.
3: Not Paying Off Transferred Debt Fast Enough
The primary reason everyday people transfer debt is to get a lower interest rate and save money. But when the monthly minimum goes down, some people continue to pay the lowest amount possible. This is a practice that has diminishing returns because the principal continues to linger and accrue interest. The faster you get the outstanding debt off the books, the better your financial position.
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4: Spending Continues and Getting into Even More Debt
Unsustainable spending habits rank among the worst problems in our consumer-based culture. We are barraged by advertisements and discount promotions every day. Regardless of how good a deal may seem, it must fit into a monthly debt consolidation loan budget. In other words, paying off the loan must take priority over buying new niceties and growing new debt.
5: Closing ALL Accounts During Debt Consolidation
After transferring credit cards and other outstanding notes to a debt consolidation loan, closing all that pesky plastic seems to make sense. But zero-balance credit cards actually have a positive impact on your credit rating. Plus, it may be a good idea to put one or two in a drawer in case of an emergency.
6: Paying Off the Wrong Debt First
Consider for a moment that you secure a debt consolidation loan but do not qualify for a product that brings everything together. Having an outstanding balance or two may not pose a substantial problem, given how much consolidation is saving you. But sometimes people choose to transfer debt out of emotion or convenience rather than strategy. It’s usually wise to move high-interest rate debt into a lower-interest rate debt consolidation loan. Another option may be to zero-out the maximum number of credit card accounts and eliminate fees. The point is to choose the most cost-effective pathway to financial security.
7: Not Asking for Help or Debt Consolidation Advice
The one thing that all the above missteps have in common is that the consumer often didn’t consult with a debt consolidation loan professional. Some of the decisions necessary to maximize the benefit of consolidation appear technical in nature. Others may seem counterintuitive to those not in the banking or lending professions. When applying for a debt consolidation loan, it’s essential to take the time and get professional advice about best practices, products, and which fit your unique financial circumstances.
Remember advisors at local credit unions are often a great resource
When considering a debt consolidation loan, the value of working with a local credit union cannot be understated. Local banking professionals are also community members and invest their reputation in getting you the best possible option. That’s something everyday people cannot get from online resources and big corporate banks. Your local credit union representative will take time to listen and diligently work through the process to help you gain the financial independence you deserve.