If you have a significant amount of debt, you may consider consolidating. Consolidation will take all of your bills and put them into one long-term loan. A consolidated loan is an especially good option for a person who has a large amount of credit card debt, especially if the cards have a high-interest rate.
A debt consolidation loan can save a person hundreds of dollars because it is extending the amount of time you can make payments and reducing the interest rates for high-interest debts. While debt consolidation can be a good idea for some people, for others it comes with some risks. Here are some ways to avoid those risks so that you can receive the benefits of debt consolidation.
Make Sure the Debt Consolidation Loan’s Interest Rate is Lower
If you have several debts that charge interest, you will have to look at each one to determine if they are a good fit for consolidation. If the consolidation loan is higher than the interest rate, you will be paying more money than you receive. Depending on how urgent your financial situation is, this may not be a concern.
The problem is that since many consolidation loans have a term of several years, the payments may seem less. While you save a few dollars each month, you may be paying hundreds of dollars more over the lifetime of the debt. If you have credit cards which have a lower interest rate than the loan, pay them off by adding a little more to each monthly payment.
Do Not Use Credit Cards After You Pay Them Off
Credit debt is a common problem among people who get debt consolidation loans. They immediately start using their credit cards again and end up in a worse situation than they started with because now they have the additional loan payments in addition to their regular credit card payments.
After you get your debts, pay off, close out some of your credit cards. Choose the ones with the lowest interest rate or the most benefits. When you use your credit cards, make sure to pay as much of the debt as possible each month. If possible, only use your credit cards for emergencies.
Don’t Take Out New Credit
A few months after your debt consolidation loan, when all of your credit cards are paid up, and your debts are paid off, you may notice an increase in your credit score. An improved credit score may open a whole new world of borrowing. Just don’t get tricked into buying anything new on credit, just because you were approved.
Instead of using credit, start a savings account to use to make purchases for major items or an emergency. Being fiscally responsible will ensure that you don’t add to your current debt during some manic shopping spree. Any new credit will increase your monthly payments, which is something you will want to avoid.
Don’t Waste All Of the Money You Save
Many people find they have extra money every month after they get a debt consolidation loan. They might save some, invest it, use it for a vacation, remodel their house or do something special for their family.
However, some people will just spend it, and then in a few months, they have nothing to show for it, which can make them feel frustrated. If an emergency comes up, they have to rely on credit to get them through it. After you consolidate your debts, you should set up a budget. A well-formulated budget can help you keep track of your spending and ensure you have enough money to live on and to save for emergencies.
Stay on Top Of Your Payments
Some people fall behind on their loan payments, despite their best intentions. For some, itís not because they donít have the money. They fall behind because they donít keep track of how they spend their money.
While a budget will help ensure you set aside money for certain purposes, you also need a system that tracks your payments. You can set up automatic payments with reminders, or you can set up a personal system where you make payments on all of your bills on a particular day of the week.
Finance tracking needs to be a routine so that you can ensure all of your bills get paid, on time, each month. Just having a list of your bills will help you remember what needs to be paid and when that payment is due.
If you follow these tips, you will benefit from getting a debt consolidation loan while avoiding the risks.
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