Introduction
If you are deep into debt and are juggling multiple repayments each month, consolidating the debts into a single one can be a relief. Debt consolidation loans can be a useful tool that can help you out of a large amount of loans efficiently. But as with any sort of debt, mishandling debt consolidation loans can have a negative impact on your credit score and finances.
Before we get into the basics of debt consolidation, there is an alternate option that you can look into if debt consolidation loans don’t seem suitable for your financial situation, such as a balance loan transfer. It’s worth looking into if debt consolidation doesn’t seem feasible for you.
On the other hand, if you think debt consolidation loans would be suitable for you, there are some things have to be careful about. Here are common mistakes that people make regarding debt consolidation loans that you must avoid.
1.Not boosting your credit
The interest rate lenders offer you depends a lot on your credit score. So taking some measures to boost your credit score before applying for a debt consolidation loan can save you hundreds of dollars in interest. Additionally, if your credit utilization is more than 30%, you should try to pay it down before applying for the loan. It would also be smart to analyze your credit history to make sure there are no discrepancies or errors because they aren’t unheard of.
2.Overspending
A debt consolidation loan can help you merge all your debts into one, which is a relief from the burden of multiple repayments, interests, and due dates. But it can also warp your perspective, since your debts seem to have halved, leading you to overspend. Once you have consolidated, avoid overspending or racking up credits.
3.Higher interest rates
The point of a debt consolidation loan is to slash the numerous payments and interest so you can save money. But if the new loan charges you a high-interest rate, then it defeats the purpose of consolidating your debt. For debt consolidation to be in your favour, the interest rates should be less than the average interest rate on the debts you want to consolidate.
4.Opting for longer terms
While a longer repayment term would be smaller monthly repayments, you would also be stuck paying more interest throughout the loan term. That would make your debt more expensive. If financially possible, you should opt for a shorter loan payment term. Make sure to calculate exactly how much you can afford to have as the monthly repayment amount to ensure you don’t end up defaulting.
5.Not checking for additional fees
There are two fees you need to be aware of while applying for a debt consolidation loan: prepayment penalties and origination fees. Lenders charge you prepayment penalties if you pay off your loan early. The fee can be hefty. The origination fee is an upfront charge to process your loan request. It’s important to take these two into account so you won’t get blindsided later. Additionally, some lenders may have other hidden charges, so make sure you inquire about it.
Conclusion
Debt consolidations can be a saving grace if you are struggling with multiple debts. However, not handing a consolidation loan responsibly can damage your credit score and land you in a deeper financial struggle. As with any financing option, you have to thoroughly do your research on it before taking any decision so you can avoid making any mistakes. We hope this article helps you look into the finer details of a debt consolidation loan before jumping into any decisions.