5 Debt Consolidation Loan Pitfalls to Avoid

It is all too easy to make a debt consolidation error. In the end, it’s much easier to fall into a debt trap than it is to get out of one. Being in debt can be extremely stressful and many people find that their options are limited when it comes to debt relief. The good news is that by understanding all of your options and knowing what debt consolidation mistakes to avoid, you can ensure that you make the right decision when it comes to your debt and avoid any consolidation loan pitfalls.

Not Shopping Around

When you consolidate your debts, it is extremely important to take the interest rates into consideration. Don’t just consolidate your debt at the first consolidation company that you locate. Instead, look around for the best interest rate possible. On top of this, look at your credit report for any errors before going to a lender. If you do find an error then you should immediately dispute it in order to give your credit score a boost and qualify for a better interest rate.

Choosing a Longer Term

When thinking about making a monthly payment many people don’t consider their loan term. By extending your repayment term, it does in fact lower your monthly payments, however it comes at a more expensive overall cost due to the fact that you have to make an increased amount of payments. When it comes to refinancing, it is important to calculate the complete cost of your loan, which includes interest. Pick a consolidation loan that has a repayment schedule that is short enough that the total cost of your loan is lower than what you would originally pay if you didn’t consolidate.

Raising Your Interest Rate

If you are dealing with a debt that has a low interest rate then you shouldn’t refinance it by consolidating with an increased interest rate. This makes no sense when it comes to your finances, as it will increase the overall cost of your debt. When it comes to consolidating debt, it is important that you compare your debt consolidation interest rate to the rates of all of your individual debts. Only consolidate the debts that will get you lower interest rates as a result.

Consolidating Unsecured Debt into Secured

There are two major types of debt—unsecured and secured. Unsecured debt is the type of debt that is not attached to any asset. This means that if you are unable to repay the debt then the lender can attempt to collect it through other means. A secured loan, on the other hand, is one that is attached to a property. This means that if you miss a debt payment then the lender has the right to take your property from you. When it comes to debt, a secured loan does come with a lower interest rate however it also puts you at risk of losing your property. Unless you are completely confident that you can keep up with your loan payments, you should avoid consolidating an unsecured loan into a secured one.

Replacing Your Debt

After you consolidate your debt, especially if it is credit card debt then it is important that you do not make the mistake of replacing the debt right away, as this can lead you to be in an even worse situation. Instead, you should ensure that you put down your credit cards after you have taken the debt off of them. If you cannot trust yourself than hide your credit cards or close your account completely in order to avoid putting yourself back into the same situation you were in before consolidation.

loans - 20 Jun, 2014 - No Comments