When you are juggling multiple debts, you think of combining all of them into a large loan. It becomes much easier to stick to the payments when you have only one loan than when you have multiple debts due on different dates. Consolidation sounds like a good option, but you have to be a bit cautious. Most of the lenders have reported that it goes wrong for many clients.
Before you put in the application, it is advisable to check your credit report. It is a must to have a good credit rating to get the nod. Financial experts suggest that you consider other options as well. For instance, you can create a payoff plan using a debt avalanche and debt snowball method. Sometimes, help from a credit counsellor is enough to keep things going.
Mistakes that you should be cautious of while consolidating your debts
If you have decided to consolidate all your outstanding loans, be mindful of the following mistakes:
You leave your credit cards open
The balance of your credit card becomes zero as soon as you apply for a balance transfer card. It will prompt you to use your card to buy something and then soon you will see your credit card debt rising again. Do not forget that you still have a consolidation loan to pay off.
Consolidation is not handy. You cannot be approved for these loans every now and then. If you have multiple credit cards, you should keep only one and make sure that the maximum limit is not more than £1,000. This card must be used to meet emergency expenses. Close the rest credit card accounts.
You choose a longer repayment period
A longer repayment period will reduce the size of monthly instalments, and therefore, you will find it a bit cheaper but do not forget that you will end up paying a lot more interest in total. You should always try to choose a smaller repayment period if possible because it will help you settle your dues quickly.
It is hard to accurately project your future financial circumstances. Maybe you lose your job, or you come across some other emergencies. As a result, you will struggle to keep up with payments. The sooner you clear your dues, the better.
You consolidate cheap debt
The main purpose of consolidation is to reduce the interest rate. It is normally recommended for debts that cost you a very high interest rate. Suppose you have payday loans, bad credit loans and overdrafts and are struggling to keep up with payments.
Payday loans and overdrafts are way expensive, and hence, it makes sense to consolidate them, but there is no need to consolidate bad credit loans as they vary relatively lower interest rates. You should pay them off in fell one swoop on the due date, so no interest is accrued on the outstanding balance.
If there is one large loan that is just coming to an end after a couple of payments, you should not consolidate or refinance it. Try to pay it off as per the current schedule because otherwise, you will be paying more money on interest for a longer period of time.
Taking on an expensive deal
Debt consolidation is mainly available for good credit borrowers. Therefore, you should always try to consider these loans before making a default. However, there is no guarantee that you will be able to secure lower interest rates. Most borrowers are under the impression that they will be able to escape high interest rates after consolidating their debts.
To try to get a full sense of how much you are paying, you should focus on the annual rates. They should be normally lower than the average annual rates. Make sure that you use comparison websites to get an accurate idea of how much it will cost you. Research is vital to ensure that you are not getting more expensive deals.
If your credit score is not so good and you still manage to get a consolidation loan, make sure that the deal is not way too expensive. It is always suggested that you drop the idea of using these loans if you are unable to secure a deal with lower interest rates. There is no point in consolidating if you cannot get money at a low interest rate.
Not checking for fees
Do not be under the impression that you do not have to pay fees while using debt consolidation loans with no guarantor. Keep an eye on origination fees and prepayment penalties. Origination fees are upfront charges that your lender would charge at the time of processing your application. Though most lenders say that they do not charge any upfront fees, it is an absolute lie.
No lender would ever lend you money without charging upfront fees, whether or not they reveal it. The disclosure is made only in the agreement that you sign as a gesture of accepting all terms and conditions. Ask your lender about the upfront fees in advance. Make sure you choose the one who is willing to lend you money without charging hefty fees.
In addition, you should pay heed to prepayment penalties. If possible, you should settle the debt before the due date. It will help you save a lot of money on interest. However, most lenders charge prepayment penalties to reduce their losses in the form of interest. Make sure you shop around for lower prepayment penalties. It would be better to choose a lender if someone charged no early repayment fees.
Making settlement
There are some companies that encourage you to choose a settlement plan in which they negotiate for lenders to accept less than the due amount. The whole payment is made in full, in one swoop, and then you are responsible for making fixed instalments to the debt settlement company. It is always recommended that you avoid such kinds of settlement plans.
Once you choose a settlement plan, payments are made to the settlement company, not to your lenders. The cease of payments to lenders is reported as delinquencies on your credit report, which has far-reaching effects. Settling for less than the due amount is also a red flag. It will make it harder for you to get money at lower interest rates down the line.
The bottom line
At the time of consolidating your debts, you should ensure you do not make the aforementioned mistakes. However, you should take on as much as you can afford. If you continue to keep borrowing money without realising your debt payments, you will certainly end up with a debt hole. You should carefully take stock of your repaying capacity and avoid borrowing money if your budget does not have enough scope to meet the payment.
Debts are normally an ideal solution only when you need money for an urgent reason, and your savings have fallen short of cash. You should create a budget and track your expenses to ensure that you do not struggle to make ends meet.