10 Common Debt Consolidation Mistakes

1. Interest Rates

You need to be very careful with interest rates and debt consolidation loans. The ease of one monthly payment may end up costing you more money. If your credit rating is poor then you may have to pay a higher rate of interest. This will make you one monthly payment much larger and even harder to afford. Make sure that this is truly saving you money before you agree to anything.

2. Loan Terms

You may see that you have a great rate of interest and lower monthly payments. They way they arrange this is by extending the loan term. This may seem like the perfect solution; however, it could cost you more money in the end. Compare what you would actually pay currently with the new loan offer. Do not be surprised if it is more even with a lower rate of interest.

3. Fees

Always make sure you understand the fees attached. Many debt consolidation loans carry with them quite hefty arrangement fees. These are usually in the loan amount. This means that you end up paying back more than you were paying originally. Make sure that this loan is the best you can get. Why put yourself in more debt if you do not have to.

4. Penalties

Some debt consolidation loans will attach very stiff penalties. These can be for late payments or if you pay it off early. Try to get a loan that offers some flexibility. Circumstances can change over time and you may find that you can pay the loan off sooner. However, it may not be worth it if there are huge penalties attached.

5. Solving the Real Problem

Many are lured into the debt consolidation trap because they want extra money at the end of each month. The problem with this is this extra money cause’s people to spend. Eventually they spend to the point where they start opening new lines of credit. In fact, most people on debt consolidation programs will run their debts back up again within 2-3 years. Learning to use credit wisely and living within a budget are the real problem.

6. Secured Debt

Some lending institutions will offer larger sums and incredibly low interest if you secure your loan against the value of your home. This can save you money but it can be very risky. Should you have trouble again, your home will be at risk. Consider this very carefully before you take it.

7. Speak to Your Creditors

Many people are afraid of approaching their creditors directly. However, those that do are quite often amazed at what they achieve. Many are able to have their payments lowered as well as a lower rate of interest. Always try this option before taking out a consolidation loan.

8. Debt Repayment Plans

A debt consolidation loan is only one possibility. You may be able to set up a debt repayment plan with your creditors. They may ask you to close the account so no further purchases can be made, however you will have a fixed date where the balance is paid off.

9. Predatory Lending

With the credit crunch, looming, lending institutions are getting very cagey about how they loan money. They may have you thinking you need a debt consolidation loan, when you really do not. Do not be seduced by ads promising you the world. These institutions are not charities they want to make money. Make sure a consolidation loan is really in your best interest before you take an offer.

10. Budgeting

Learning to budget wisely is the best way to avoid unnecessary debts. Get advice from a financial planner on how best to spend your money. They can tell you if a debt consolidation loan is really, what you need.