Many people are unaware of the various stages of debt consolidation. This especially implies to people who have been newly introduced to the concept of debt consolidation so that they can refrain from committing common debt consolidation loan mistakes. It is quite obvious that you will make debt consolidation mistakes in the initial stages of your debt repayment.
It is true that by making mistakes, you learn and develop wisdom. However, it may delay your debt repayment process.
So, before you make payment through debt consolidation, it is better to have a brief idea about the mistakes you might be making while consolidating the debt. The knowledge will help you to avoid debt consolidation mistakes and repay debt efficiently.
8 Commonly known mistakes while consolidating debts
1. Selecting the wrong option
It often happens that since we are so anxious about the debt repayment that we tend to ignore the mandatory things that are vital for a successful debt consolidation.
As a consumer, you need to be aware of the pros and cons of each option so that you know what you’re opting for. Make sure that the option you choose is in accordance with your financial situation and affordability.
2. Not verifying the company
Don’t just blindly trust the credit consolidation company that you meet in your way. You should check the legitimacy and the records of the organization from various sources before coming to a final decision. This can also help you from getting scammed. Also, what is required for you to compare the terms that the companies are offering before you sign agreement with one of them.
3. Not assessing your financial condition while taking out a HEL
To a layman, it is quite appealing to take out a home equity loan (HEL) or a home equity line of credit (HELOC) to pay the creditor. In lieu of a single payment made at one interest rate, you can choose to wipe out your credit card debt and other unsecured bills. This can keep your debt situation more organized and less overwhelming.
However, one of the debt consolidation mistakes you can commit while choosing this option is that not assessing whether or not you’ll be able to repay the home equity loan on time, if you can’t you may lose your home.
4. Not assessing the credit report
It is imperative to evaluate the credit reports before applying for a credit consolidation loan. Too many debts or errors in your report will create a problem for you while taking out a loan. Hence, you should make it a point to check your credit report thoroughly and contact the credit reporting agencies immediately when you observe any discrepancies.
5. Not paying heed to the introductory period of balance transfer
When debtors think of using the balance transfer method, it is necessary to pay attention to the introductory period. This determines the period within which you need to repay the entire outstanding balance; otherwise, you’ll have to pay off the remaining amount at a much higher rate of interest.
6. Ignoring your emergency fund
Since you have been entirely focusing on how to pay debts, you may be missing out on accumulating money for an emergency fund.
An emergency of some kind, whether it’s a medical expense or an unexpected car repair may occur when you are paying off your debt. If you don’t become serious about it, you may end up facing hurdles in the future as it can dig you deeper into debt.
What you should do is be cautious about your savings and try to maintain a small cash cushion while you are consolidating and paying off debt. It is advisable you decide for a monthly payment which you can make after meeting your necessities and depositing an amount into your emergency fund.
7. Unable to address the root cause of the debt
Have you gone through the root cause of what’s causing the debt to occur in your life? How is the debt amount increasing over a period? Wondering how to pay off debt with little money?
Many people commit such debt consolidation mistakes by going for consolidation without assessing the reasons behind falling into debt.
Some of the reasons of debt problems can be due to a job loss which doesn’t lead to any spending cuts, an unexpected arrival of “random” expenses like vet bills, medical expenses, family emergencies.
Unable to address the root cause of the debt unable to address the root cause of the debt
So, you should at first find out the root cause so that you can prevent it from happening again. Doing so, you can be successful in consolidating and paying back outstanding bills.
8. Becoming a victim of a debt relief scam
Many consolidation companies falsely advertise about reducing the debt overload. But don’t get carried away by their false assurances. While some reputable organizations offer credit counseling and other services, there are several companies whose chief goal is to take your money. While others may attempt to reduce your debts, but often are seen using questionable practices like holding the payments aside for several months. They can even put you in a position where you are so lagging behind the bills that there is no option left but to opt for settlement or file bankruptcy.
One way to examine the scam is to see when they ask you to pay. If a company demands an upfront payment, you may be conned.
The bottom line
Really, now you must be thinking is debt consolidation a good idea? When you are overwhelmed with debt, it’s time to confront and quickly find ways to fix it. But keep in mind that you did not go into debt overnight, so it’s quite unlikely that you will recover from it quickly. If you want to make sure that you want to get rid of the debts, make sure you avoid the mistakes; otherwise, it can invite more debt problems in the near future.