When done right, debt consolidation can simplify your finances and save you thousands of dollars in interest fees. But if you’re not careful, you can end up making one of these crucial mistakes.
Not checking your credit report before applying for a debt consolidation loan – By consolidating your debt, you replace many small high-interest debts with a single low-interest loan. Therefore, you need a loan that is large enough to pay off all of your credit cards, personal loans, etc. The APR on that loan must be lower than on your current debts. If you’re really deep in debt, you may not qualify for such a loan. Check your credit report to see where you stand.
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Choosing the wrong debt consolidation company – There are many unscrupulous companies eager to take advantage of vulnerable individuals. Make sure you choose a company that you can trust. Check with the Better Business Bureau for a list of reputable credit counselors. Don’t let anyone pressure you into something that doesn’t feel right.
Forgetting about the fees – You know about the interest and the monthly payments, but have you calculated all of the fees? Depending on the company you choose, there may be a processing fee, monthly service fees, even a fee for paying off the balance before it’s due. Read the small print and take everything into account.
Not shopping around – There are thousands of debt consolidation companies. Don’t automatically go with the first one you see. Shop around for the best deal on the loan, but don’t necessarily go with the cheapest. If it seems too good to be true, it often is (see number 2).
Taking the counselors at their word – Don’t leave the calculations to the debt counselors. They can be very helpful, but at the end of the day, it’s your money. Double check everything so you know exactly how much you’ll owe.
Taking out a secured debt consolidation loan – Secured loans seem like a great deal. They’re easier to get than unsecured loans and have lower APRs. Before you sign on the dotted line, consider the risks. If you start missing payments, the lender may take away your home.
Blindingly consolidating every single debt – Many people do this because it’s simpler to keep track of a single loan. But if you have a credit card with 0% APR or a low interest loan, it doesn’t make financial sense to consolidated it with a more expensive loan.
Not changing your lifestyle – Debt consolidation is not the same as financial freedom. You still owe the same amount. It’s just that the debt is cheaper. If you want to be debt-free, you have to address the root of the problem. Do not spend more than what you have.
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When is debt consolidation not a good idea?
Debt consolidation makes sense if you can get a large enough loan at a small APR. If you don’t qualify for a low-interest loan, you may want to consider other options, like debt settlement. Alternatively, you can try to raise your credit score by correcting any mistakes on your credit report and paying all of your bills on time. With a higher score, you can get a better loan.
Debt consolidation is not a quick fix. It’s a long-term solution. It can take years, even decades, to pay off the loan. If you want to be debt-free sooner, look for a different debt solution.
What to do if you’ve already made a mistake
If you’ve made a mistake, it’s not the end of the world. Talk to a reputable debt advisor, who can help get you back on the right track, and pay close attention every step of the way. Know how much you’re borrowing, from whom and for how long. Take into account the interest and the fees. Ultimately, it’s up to you to manage your finances.