People combine multiple loans into one big loan to save money by getting a low interest rate. However, debt consolidation will get you in trouble when you do it wrongly. By reading this article, avoiding common debt consolidation mistakes will no longer be a problem for you.
Additionally, paying to one lender is easier and much simpler rather than paying to 3 separate lenders. Continue reading to find out the best way to avoid mistakes in debt consolidation.
6 Tips for Avoiding Common Debt Consolidation Mistakes
If you are thinking of getting debt consolidation, here is everything you need to know beforehand. Make sure you understand it thoroughly before starting!
1. Do Not Choose in Rush
There are lots of ways to lump several loans into one, make sure to pick carefully which one suits your budget and needs. It is okay to take some time to consider rather than choosing one hastily. Here are some options you can choose for consolidating your debt:
- Personal loans are one of the most popular options since they require no collateral, and you can shop around to find a lender with the lowest interest rate. Some lenders will even consider someone with a low credit score.
- Home equity loan: this type of loan usually has a lower interest rate than a personal loan. However, you might lose your house if you cannot pay your debt.
- Balance transfer credit card: by transferring a credit card balance to another credit card, you might be able to pay debt with a low to no interest rate. But you need to pay back as soon as possible before the promotion period ends. Or you will end up with a higher interest rate.
2. Consider the Fees
Some people might just focus on the interest rate when thinking of borrowing money. This is a mistake. You should consider everything before borrowing money, including the fees. Not counting the fees might make you lose more money than you think. There are 3 fees you need to look out, such as:
- Origination fees: This is a one-time fee from the lender to start your loan. Ask your lender about the origination fees before you borrow the money and determine whether they are within your budget.
- Prepayment penalties: Lender gets profit from your interest. So, in case you can afford to pay the loan earlier than expected, the lender will impose a penalty fee. Look for a loan without prepayment penalties if you think you can cover your debt earlier.
- Late payment fees: If you somehow forget to pay your debt on time, there will be a late payment fee. Thus, remember to always pay them on time without delay.
By understanding those additional fees, avoiding common debt consolidation mistakes is no longer something to worry about.
3. Borrow As Much As You Need
Before you decide to borrow the money, count how much debt you currently have. You might get confused when you find some lenders offer a higher price than your current debt. If it ever happens, do not take it!
Overborrowing money means you need to pay for interest that you do not need. It is better to find lenders who offer a smaller amount of loan that suits your needs, instead of overborrowing money.
4. Check the Lenders’ Requirement
Checking the lenders’ requirements is the first step in avoiding common debt consolidation mistakes. Maybe some of you have gotten rejected by lenders and wonder why. Well, you need to make sure to read the requirements carefully.
Perhaps you do not meet the lenders’ criteria; whether it is your credit score or a lack of documents, it leads to application rejection. Only submit your application to the lenders with the requirement that you can fulfill it. This way, you can get the borrowed money faster.
5. Think About the Loan’s Length
People often think that the lower the interest rate the better. However, this is not the case. You also need to consider the period you need to pay the interest. The longer your loan term means more interest you need to pay. If you can afford to pay more monthly, it is better to choose a loan that does not have a long period to save your money.
6. Getting Caught in a Cycle of Debt
It is good that you think of paying off all the debt you have. But, have you ever considered taking some time and thinking, how can you be in debt in the first place? If not, then it is now the best time to think. Understand the root of your excessive spending and reach financial stability. Use these tips to do so:
- Analyze your budget: You can do this by analyzing your bank statement. Check what kind of things you buy in a month. Is it something you need or just buy on impulse?
- Do not do impulsive buying: When you want to do online shopping, do not immediately do it. Just put the object on your cart first and think for 24 hours, is it something you need or just want to buy impulsively? If you cannot handle the impulsive buying, consider uninstalling the application.
- Write down everything you need to buy: This way, you can keep track of everything you need and not waste money on unnecessary items.
- Review your credit report: By reviewing your credit report, you will find how much debt you owe and whether you made payment in time. Keeping a good credit score is good for you, as lots of things related to money will be determined by your credit score.
Do You Already Know Why Avoiding Common Debt Consolidation Mistakes Is Important?
After reading through this article, it turns out there are lots of things you need to watch out for before consolidating debt. Initially wanting to save money, you might accidentally spend more if not careful. Consider the interest rate, and loan length, and compare which method works best for you.
When you are finally free of debt, do not forget to be careful so you can be financially stable and no longer need to borrow money. Good luck!