Having multiple outstanding loans, all with different interest rates could quickly become a headache if you aren’t vigilant enough about repayments. And, given how all lives have gotten so all-consuming, having that sort of close monitor on monthly repayments could be challenging.
One default on your repayment could cause a ripple effect, worsening your credit score and making your financial situation harder!
This is why taking a Debt Consolidation Loan is a great and easy way to pay off your debt. But to make the most of this plan and not get yourself in further financial troubles, you need to avoid some common mistakes.
What are these mistakes?
Let’s take a look!
Taking Consolidation Loans for Small Debts
Sure, calculating several loan repayments and keeping track of deadlines is a chore. But, getting a Debt Consolidation Loan to merge your EMIs is not the way to go in every situation.
It’s essential to assess your debt situation and then decide whether it even warrants consolidation or not.
If you assume that your debts can clear up in six months or a year, Debt Consolidation is not the right call. But if you have multiple long-term loans, then consolidating it might be an effortless and economical option.
Not Resolving the Root Problem
Often, troublesome and hefty loans lie in the budgeting habits that a person struggles with. If you do not acknowledge the issue at the source, it’s hardly likely to solve your financial hardships, even post loan consolidation.
Consolidation can even aggravate your cause of debt, thus putting you back in the trap you tried so hard to climb out of.
For example, let’s assume you struggle with the issue of your credit cards being overcharged. If you move your current debt into a consolidation, it will free up your credit card loans. If you have difficulty resisting using the cards, you will quickly fall back into old patterns.
So, it’s essential to acknowledge and work constructively to create a monthly budget. Balance your expenses and income wisely. Do remember to keep a reserve for an emergency. And, don’t spend on non-essential purchases.
Once your root cause is sorted, the Debt Consolidation will alleviate your situation and improve it.
Not Considering Repayment Timeline
Getting a consolidation loan is tempting because it elongates your payment time while reducing your monthly payments. But, with a long repayment timeline comes the downside of paying extra interest.
For example, you assume that you could repay your debts in three years. But with Debt Consolidation, you get a chance to pay it in six years slowly. Here’s the thing, though. Even if your consolidated loan has a low-interest rate, it will still cause you to pay a more considerable sum of total interest.
So, when choosing the consolidated loan path, pick one with the shortest loan repayment time.
Do not focus on the monthly payment volume, and consider the big picture, including the interest rate.
As of 2021, according to OECD, an average Australian household owes twice as much of what it earns in one year. The ratio of debt to net disposable income is 217%. That’s a staggering number!
Debt consolidation is one great way to straighten out this situation. But there are some mistakes that you must avoid when adopting this path.
Do not consolidate loans for small debts. Identify the root cause of your debt troubles and nip it in the bud. And pick the loan with the shortest repayment plan to save money on interest.
These mistakes are not very difficult to prevent as long as you have a responsible outlook on your financial situation. Then watch how quickly you pay off all that you owe!