7 Mistakes to Avoid with Your Debt Consolidation Loan
Securing a debt consolidation loan and paying down your obligation can fast-track you to an improved credit rating and financial stability. But success requires personal vigilance and fiscal responsibility.
Needless to say, not everyone trying to consolidate debt achieves their goal of financial freedom. That’s largely due to making one or more of the common mistakes that slow the debt-free process or result in setbacks. If you are considering taking out a debt consolidation loan, it’s imperative not to make financial missteps along the way. These seven rank among the most prevalent and unfortunate errors by borrowers who take out a debt consolidation loan.
1: Not Having a New Budget or Plan for Paying off Your Debt
Using a debt consolidation loan such as a home equity loan, personal loan, or low rate credit card can turn your high expenses into one manageable monthly payment. The strategy generally lowers the expenses of high monthly interest payments by consolidating them into a lower interest rate solution that saves money and often results in a faster payoff period. But consolidation is only a viable long-term solution if you craft a budget that accounts for the loan repayment and is realistic about additional expenses. Because of this, you must make a budget before you take out a debt consolidation loan.
2: Taking Out a New Loan at a Higher Rate
A debt consolidation loan only makes good financial sense if it delivers an interest rate that you can afford. It’s not uncommon for people struggling to manage multiple expenses to take the first loan product available. If the rate is too high for your income-to-debt ratio, the likelihood of late payments or defaulting increases. That could have a devastating effect on your credit score. Shop around for the most competitive rate possible and be sure you are selecting the best product for your financial situation.
3: Not Paying Off Transferred Debt Fast Enough
The primary reason everyday people transfer debt is to get a lower interest rate and save money. But when the monthly minimum goes down, some people continue to pay the lowest amount possible. This is a practice that has diminishing returns because the principal continues to linger and accrue interest. The faster you get the outstanding debt off the books, the better your financial position.
4: Spending Continues and More Debt is Added
Poor spending habits rank among the worst problems in our consumer-based culture. We are barraged by advertisements and discount promotions every day. Regardless of how good a deal a purchase may seem, it must fit into a monthly debt consolidation loan budget. In other words, paying off the loan must take priority over buying new niceties and growing new debt.
5: Closing ALL Accounts During Debt Consolidation
After transferring credit card debt and other outstanding balances into a debt consolidation loan, closing all those credit cards may seem to make sense. After all, credit card spending may have been the virtual bane of your existence until getting the loan. But zero-balance credit cards actually have a positive impact on your credit rating. It may be a good idea to put one or two in a drawer in case of an emergency.
To discover how a home equity loan can help you achieve your goals, download our free eBook:
6: Paying Off the Wrong Debt First
Consider for a moment that you secure a debt consolidation loan but do not qualify for a product that brings everything together. Having an outstanding balance or two may not pose a substantial problem, given how much consolidation is saving you. But sometimes people choose to transfer debt out of emotion or convenience rather than strategy. It’s usually wise to move high-interest debt into a lower debt consolidation loan. Another option may be to zero out your outstanding credit card balances to eliminate fees. Although this strategy will be different for every individual situation, the point is to choose the most cost-effective pathway to financial security.
7: Not Asking for Help or Debt Consolidation Advice
The one thing that all the above missteps have in common is that the consumer often didn’t consult with a debt consolidation loan professional. Some of the decisions necessary to maximize the benefit of consolidation appear technical in nature. Others may seem counterintuitive to those not in the banking or lending professions. When applying for a debt consolidation loan such as a home equity loan, personal loan, or low rate credit card, it’s essential to take the time and get a consultation about best practices, products, and which fit your unique financial circumstances.
Your Local Credit Union Can Help
When considering a debt consolidation loan, the value of working with a local credit union cannot be understated. Local professionals are also community members and invest their reputation in getting you the best possible option. That’s something everyday people cannot get from online resources and big corporate banks.
America’s Credit Union offers affordable home equity loans, personal loans, and low rate credit cards to help with your debt consolidation needs. If you are ready, visit our website and apply online.
Still not sure which solution is right for you? Contact our loan professionals today to review your specific financial situation and find the best product for your needs.
Membership in America’s Credit Union is open to anyone who lives or works in Dallas, Rockwall or Collin Counties, Texas, and their family members. Employees of select employers may also be eligible. See our Membership page for details.