3 Debt Consolidation Traps You Must Pass Up
Debt consolidation has taken the world by storm, of late. According to an article published on https://www.huffpost.com, after the 2008 economic slump, the banks and lending institutions tightened their loan approval system and therefore, it was impossible to get a personal loan from these lenders. Then, that does not mean that you borrow money from fly-the-night agencies and fall prey to debt consolidation traps.
When it comes to a debt management plan, it is a contract between the borrowers, creditors, and maybe a non-profit counseling body. The credit counselor work in collaboration with the creditors to consolidate your small loans for a long repayment period or a reduced rate of interest. The repayment tenure is usually fixed at three or five years. If you take the assistance of a counseling agency, you shell out a small fee of $50 per month. However, there is no compulsion to avail the services of a credit counselor. It is your choice and completely based on your requirements.
There are a couple of consolidation plans with high upfront costs, be it transfer fees or origination fees. Therefore, you should tread carefully and avoid the traps that may lie in your path. Else, you may end up in a financial crisis. Fret not. Here are three debt consolidation traps you must avoid:
1. You do not research on reliable debt consolidation firms
You will find numerous ways to merge your small loans into a single payment system. You may opt for a secured or unsecured loan. There are other options like transferring your old debt into a new existing line of credit. Or bring all your debts under a balance transfer credit card. Again, there are options such as debt management and debt settlement. We have already discussed debt management plans. When it comes to debt settlement, it is the method of paying a huge amount to settle an existing loan yet less than what you have actually borrowed. If you hire a negotiator to reduce the outstanding balance on your behalf, you will need to pay a fee, usually a certain percentage of the amount that is waived off the loan.
According to financial experts in the industry, a credit-counseling firm divides their rate of interest into half and reduces a borrower’s total monthly payment sum by approximately 20 percent. Now, both debt management and debt settlements have their benefits and pitfalls. They will vary based on your financial condition and other related factors. You may fall into some trap if you are not clear about the terms and conditions of these methods.
Understand the terms before you sign the final agreement. Avoid credit counseling agencies that charge more upfront fees or include some hidden charges. Always ask whether there are any hidden fees or not. Read the agreement carefully. If you opt for the credit card balance method, the reduced rate may exist for a promotional period but the rate increases after the expiry of the promotion.
Many borrowers think that making the minimum payment will reduce their debt. No, it will not. You can never become debt-free if you keep using your credit card or line of credit.
The solution is looking for a reliable debt consolidation provider with reasonable interest rates and a longer repayment period. You can read more about debt consolidation tips and tricks on platforms like National debt Relief.com or similar ones. Therefore, research your options well.
2. Not understanding the root of the issue
Usually, borrowers opt for debt consolidation when they overspend compared to their monthly earnings. They cannot manage the expenses and face grave consequences when creditors pester the borrowers to repay all debts. It is not the right approach, according to financial experts. Instead of adjusting their lifestyle and spending habits, the borrowers hire any consolidation firm without learning about their credentials.
When it comes to consolidation, it occurs when there is an amount of $10,000. These loans do not occur in a day or two and therefore, a solution shouldn’t be embraced overnight. If you do not understand what made you borrow so much money in the first place, it may happen again the days to come.
According to experts, borrowers may not take an insurmountable loan again, but start spending extravagantly and resort to their old spending habits soon. Therefore, if you cannot change your lifestyle and overspending habits, you’ll be forced to take loans in a couple of months. You need to change your habits and make some sacrifices to live a debt-free life.
The solution is to understand the root of the problem. Spend less on shopping, movies, eating at restaurants, and reducing your expenses on living and car payments. It is imperative to maintain a balance when it comes to your income and expenses.
3. Start using credit cards soon
Do not fall into the trap of using your credit cards soon after you have repaid your debts through a consolidation loan. The borrowers think that they are debt-free now and can take credit card debts to manage their daily expenses. It is the greatest mistake that will put you in financial problems again. You start spending heavily on unnecessary expenses and you start using your credit cards. Your debts start increasing and you are back in the same position when you were in debt a year ago.
Once you start using your credit card, it becomes a habit again. You think that you have a credit limit and so can spend as much as you like. You are drowned in debt soon and end up borrowing money like before, thus affecting your financial condition.
The solution is staying away from any new debts or credit card loans because you must save money each month. It will help you improve your financial condition for emergencies. You must stop using most of your credit cards and close them to play safe. If you do so, you cannot use the card even if you want to do so. Use only one credit card with a low credit limit.
Now that you have these tips handy, take a consolidated loan from a reputed and reliable organization. Spend carefully and become debt-free soon.