Although debt consolidation sounds like a quick and easy fix, there are many instances when you would want to consider a different course of action.
Below are a few illustrations of when you would not want to pursue debt consolidation.
You are without a job, and have no means of income.
You would have a hard time meeting the payments of the new loan. You don’t want to lose your home trying to consolidate your debt.
You don’t own a home. Typically debt consolidation loans are second mortgages, unless you have very good credit. In that case, you could possibly get an unsecured loan with which to consolidate your debt.
When the payments of the new loan are the same or more than the entirety of what you were paying monthly on your individual accounts.
When the interest rate on your new loan is as high as the interest rate you had on your high interest rate credit cards. You won’t be saving any money.
Your credit score is very low. In today’s economic climate, you will probably not get a loan with a credit score of less than 621. There’s no use in injuring it further with credit inquiries into a new loan.
Video: How to Fix Bad Credit
Mistakes in the Making
Neck deep in debt and heard that a debt consolidation may be a quick fix? You may want to put that decision on hold until you really find out what you’re getting yourself into. There are many common mistakes you can otherwise avoid if you do your homework. Some of these mistakes could require you to pay dearly for years to come.
In order to avoid those mistakes, you’ll want to know what they are. Take a glimpse into several of them, and get ready to become educated, enabled, and empowered. Many who obtain a debt consolidation loan do not execute the following:
Budget. Many who go into a debt consolidation loan don’t have a budget in place to ensure that they don’t get in over their heads in debt again. A budget will empower you to be the master of your money, the pope of your pocketbook, the grand gladiator of your financial arena.
Credit Reports. Not knowing what’s on your credit report can hurt you when you go to apply for a consolidation loan.All the credit reporting agencies are required by federal law to provide you with one free credit report per year. Take advantage of this benefit, and request one from each credit reporting agency. Check your report for errors, and submit corrections. Make sure the corrections to your credit report are noted prior to applying for your debt consolidation loan.
Preparation. Do you know how much your total debt is, so you’ll know the amount you’ll need to borrow? And, do you have copies of statements that support that amount? How about a copy of your most recent tax return? Or, a means prepared to verify your income? If you don’t have all of these items prepared, you need to do so before even searching out a debt consolidation company.
Research. The devil is in the details. One of the costliest mistakes people make in obtaining a debt consolidation loan is not researching the charges of several different loan companies prior to accepting a debt consolidation loan. You need to find out what the companies charge prior to selecting a loan consolidation company. Before putting your John Hancock on that dotted line, obtain a detailed breakdown in writing of all costs that will be applied to the loan from the prospective loan company – e.g., administrative charges, insurance and brokerage fees. If the fees appear to be high, don’t hesitate to ask the company to reduce, or even dismiss, the charges before you sign.
Destroy Credit Cards. If you don’t cut up the cards, you’ll be tempted to use them. Get out the scissors and go to town; otherwise, you may end up back in that same sinking ship, only this time without a life vest.
Bad Company. Many have made the mistake of choosing the wrong company for the consolidation loan. The company may use a bait and switch to obtain customers – i.e., offer one interest rate, but it’s several points higher when you close. There are many predatory lenders that have been prosecuted by the Federal Banking Commission (FBC) due to fraudulent practices. Don’t get duped into using one of these companies. Check with the FBC to see if the company you are considering is suspected of fraud or predatory lending. Contact the Better Business Bureau (BBB) to see if there have been any complaints. Again, obtain all fees up front and in writing prior to signing any contract with the company.
New Credit. Tempting, isn’t it? You’ve cleared the slate, so to speak, and see that you have money left over at the end of each month now. Your credit score is looking good, and you stumble onto a big plasma screen TV on clearance at a price you think you will never see it at again. Open a new line of credit and you’re toast. Don’t give into compulsions to open new credit. That’s how you got into trouble in the first place.
Video: Secured Debt Consolidation
Some other considerations you’ll need to bear in mind have to do with the debt consolidation company you choose, and developing a plan to reduce your debt.
Calculations. When you do find a debt consolidation company that appears reputable, make sure you, also, do all the calculations for all noted fees that will be applied to your loan. You are the one who will be paying on this for the next few years. Don’t leave it to the debt consolidator to be the only calculators of your financial future.
Debt Payoff. Take care to arm yourself with a debt reduction plan that will enable you to pay off your debt within a specific period of time. Your budget will tell you how much you have left over at the end of each month. Decide on a period of time that you want to have your debt paid off. Calculate how much it will take each month to accomplish that. If it is more than 50% of what you have left over each month, you may want to calculate a longer pay off period. Don’t put yourself in a pinch. Do decide on a payoff period, and stick to it, just like you stick to your budget. You’ll be on the freeway to financial freedom quicker than you think.
If you do end up as one of the statistics who didn’t do their research and fell prey to predator lending, there is still hope. Is your interest rate higher than you were paying on your credit cards? Are your payments as much as you were paying on the totality of your monthly credit cards payments before?
Don’t let it get you down. Keep paying the payments, and pay them on time. Work diligently to keep your loan paid up, and do not open any new accounts. After six months or so, do you research and find a good, reputable lender. Either refinance your home for a better interest rate, or obtain a better rate on a second mortgage. Either way, you’ll pay off that noose of a debt, get rid of the bad lender and be back on track to pay your debt off in a shorter period of time.
Preparation. Do you know how much your total debt is, so you’ll know the amount you’ll need to borrow? And, do you have copies of statements that support that amount? How about a copy of your most recent 