Consolidating your debts can seem like an attractive option when you’re struggling to keep up with multiple credit card payments and loans each month. However, debt consolidation comes with some potential pitfalls that you’ll want to avoid. Follow these tips to make sure debt consolidation goes smoothly for you.
Don’t Consolidate Without a Plan
Before you consolidate, think carefully about what you want to achieve. Are you looking to lower your monthly payments? To pay off debt faster? To reduce interest rates? Know your objectives upfront so you can choose the right consolidation method. Consolidating without a clear goal can leave you worse off in the long run.
Watch Out for Higher Interest Rates
Debt consolidation loans sometimes come with higher interest rates than your current debt. Run the numbers carefully when comparing a consolidation loan to your existing interest rates. Focus on the total amount you’ll pay in interest, not just the monthly payments. A loan with a lower monthly payment can ultimately cost you much more over time.
Beware of Long Loan Terms
Consolidation loans typically stretch your repayment term out to 5-7 years. The benefit is a lower monthly payment. But, a longer term also means you pay more interest over the full loan. Avoid terms beyond 5 years if at all possible. The longer you take to repay debt, the more total interest you’ll end up paying overall.
Don’t Use Loans to Pay off Credit Cards
One of the worst uses of a debt consolidation loan is paying off credit card balances. Credit cards likely have higher interest rates than consolidation loans. Once you pay off cards, the temptation to rack up more credit card debt can be very strong. You could easily end up in a worse place financially than when you started.
Watch for Penalties and Fees
Debt consolidation loans and balance transfer credit cards sometimes come with penalties for late payments, going over your credit limit, or ending the loans early. Read the fine print to fully understand any fees you may incur. Upfront fees on consolidation loans should be avoided whenever possible.
Consider Non-Loan Options
Before taking out a loan, look into non-loan consolidation options like negotiating lower interest rates directly with your creditors or using a 0% balance transfer credit card. While not always possible, these options let you avoid consolidation loans and extra fees.
Get Professional Advice
Talk to a credit counselor or financial advisor before deciding on consolidation. An expert can review your full financial situation and suggest the debt payoff methods most likely to save you money in both the short and long term. Don’t go it alone on major financial decisions like debt consolidation.
The right debt consolidation approach can offer real benefits if done carefully and strategically. Just make sure to avoid these common pitfalls that can leave your finances worse off. Analyze all your options thoroughly and move forward with a clear payoff plan. With diligence and commitment, you can become debt-free.
