People often struggle with multiple debts. For them, a low interest debt consolidation loan might seem like a good solution. In my opinion, it combines all your debts into one. Also, this can potentially offer a lower interest rate. But be careful!
Many people make mistakes that can make their situation worse. In this blog, we’ll look at these common errors and how to avoid them. If you’re thinking about consolidating your debt or have already started, this information will help you make smart choices.
[1] Not Looking at the Whole Picture
Many people get excited about lower monthly payments. Just like me, they forget to look at the big picture. Sure, paying less each month feels good, but you need to think long-term.
Say, you owe ₹10,000 on credit cards with high interest. Then, you are offered consolidation loans with lower repayment options. Great, right? Maybe not.
This loan may stretch out over a longer time. Now, you might end up paying more in total. This is possible even with a lower interest rate.
Always do the math. I would say, add up all the payments of the entire loan period. Compare this to what you would pay if you kept your current debts. Do not forget to include any fees for the new loan. Sometimes, what looks good at first glance isn’t the good deal in the long run.
[2] Not Fixing the Real Problem
Getting a consolidation loan can feel like a fresh start. But here’s the thing – it doesn’t fix the reasons why you got into debt in the first place. If you don’t change your spending habits, you might end up right back where you started, or worse.
Think about why you’re in debt:
- Do you spend too much?
- Do you not have a budget?
- Did an emergency catch you off guard?
Consolidating your debt won’t solve these problems. You need to make changes.
[3] Choosing the Wrong Way to Consolidate
There are several ways to consolidate debt, and picking the wrong one can cost you. Let’s look at some options:
[a] Personal loans
It may have lower interest rates than regular credit cards. You get a fixed amount to pay each month. It can make budgeting easier. But you need good credit to get good rates.
[b] Debt management plans
These are offered by credit counseling agencies. They can help you lower your interest rates and combine your payments. However, they might affect your credit score. You need to restrict your credit cards as well.
[4] Forgetting About Your Credit Score
Your credit score is really important when you’re consolidating debt. It affects you can get a loan and what interest rate you’ll pay. But many people don’t check their score before applying or don’t think about how consolidation might affect it.
I would suggest to verify your credit score before getting a loan. If your score is low, you might not get good interest rates. It might be better to work on improving your score first.
Remember, applying for a new loan or credit card usually causes a small, temporary drop in your credit score. If you close credit cards after consolidating, it can also hurt your score.
On the bright side, if you make your payments on time for your new consolidated loan, it can help improve your credit score over time.
Concluding Notes
Debt consolidation can be a paramount way to manage your debt. But it’s not magic. You must avoid these common mistakes – Go on and make debt consolidation work for you. Remember, a low interest debt consolidation loan may often fix your finances. Budgeting and prudent spending are also essential.
In my opinion, if you’re not sure about anything, it’s okay to ask for help from a financial advisor. With careful planning, debt consolidation can be a big step towards getting out of debt and reaching your money goals.