Top 5 Mistakes to Avoid When Considering a Debt Consolidation Loan
A high amount of debt can be overwhelming, and you often wish to pay it off quickly. One way to do that is by consolidating all the debt and taking a personal loan to pay off all the obligations. You can combine all your high-interest loans and take a personal loan on low interest to repay them. Instead of dealing with numerous monthly bills, a debt consolidation loan can be your single repayment plan.
While this sounds like a smart plan, it can often go wrong. If you are not careful, a lot of mistakes can turn out to be costly. This is why we have compiled a list of mistakes you can avoid when considering a debt consolidation loan.
- Unable to Find the Cause of Debt
Taking a debt consolidation loan may look like the right option. But if you cannot identify its root cause, the problem will persist. The problems could be a bad budget habit, overspending, overcharging credit cards, etc.
These are the common ways to approach the problem:
- Go through your monthly credit card bills and statements and figure out your spending patterns. You can identify areas where you are spending excessively and accumulating debt.
- Once you have tracked your spending, create a budget to reduce your debt. Follow the budget strictly to avoid further debts.
- Choosing Longer Tenures
Longer tenures do reduce monthly EMIs, but the repayment takes a lot of time. If you choose a longer tenure for debt consolidation, you will not be debt-free any time soon. This also means you would be paying personal loan interest for a long period of time.
For example, if you were about to pay off your debts in two years. But the debt consolidation loan you have taken has a tenure of five years. Then, you will end up paying more in total interest costs.
Thus, take a debt consolidation loan with a shorter term for your debts and focus on monthly payments alone. This will help reduce personal loan interest expenses and the overall debt burden.
- Spending Impulsively and Getting Into More Debt
Consolidating your debts saves you money, and if you are not careful this time around, you might end up in debt again. This is the time when you need to stop taking out more credit and resist all your spending impulses. Avoid or limit using your credit card until the debt is cleared. You can also lower the credit limit. It is not recommended to close the credit card as it affects the credit score.
- Not Having a Repayment Plan
Make a proper repayment plan before taking a personal loan to pay off your debts. If you don’t have a plan, you might end up in debt again.
You can consider these points while coming up with a plan of your own.
- Determine what percentage of your income you can allocate towards debt repayment.
- Make a budget and follow it religiously.
- Whenever you get a bonus or extra money, you can use it to repay your debts.
- Cut down on needless spending.
- If you have the time and resources, find ways to increase your income.
- Not Setting Up an Emergency Fund
What most people do while paying off their debts is focus on a single goal. They forget the importance of savings. Getting rid of debt is a good thing, but you can’t just ignore the savings. An emergency can occur at any time. And if at that time you don’t have any money saved, you might end up taking on more debt. Hence, you always need to be prepared, and the best way to do it is with an emergency fund. Put a chunk of your money at regular intervals towards an emergency fund. You can start small but consistently. Save at least 4 to 6 months’ worth of living expenses.
- Not Seeking Professional Help
There are multiple resources available online that can help you make a solid plan to pay off all your debts. But at times, you might remain unaware of the minor defects it contains. So, it is best to seek professional help. They can tell you about new products or practices that can suit your circumstances better. There are many institutions and agencies set up to help you with debt consolidation.
Conclusion
Consolidating all your debts into one and finishing it off with a debt repayment loan is a concrete plan. However, you need to be responsible before you implement it. Look around for options and choose the option with a low personal loan interest rate. Make sure the tenures are not too long, as this increases the interest costs. Control your spending so that you keep your debts at bay. And whenever in need, always seek professional help. They can provide you with the best solutions based on your situation. You can reach out to us at Piramal Finance, where our experts will solve your financial queries.