How to Succeed in Paying Off Debt After Obtaining a Debt Consolidation Loan
After months, or years of struggling to pay down debt, debt consolidation can feel like a huge weight has been lifted off your shoulders. While it’s nice to enjoy this newfound relief, it’s important not to become too eager and make some common mistakes, or slip back into bad financial habits.
What Is Debt Consolidation?
Let’s back up here for a second. You might be wondering – what is debt consolidation?
Debt consolidation is the process of combining all, or most, debts – including credit cards and personal loans – into one single debt. This is done by obtaining a debt consolidation loan.
Why You Would Choose This Option
The main benefit of debt consolidation is that you will only have one fixed monthly payment, rather than one for each of your debts – resulting in less time, account juggling, and stress in paying your debts. Debt consolidation is also beneficial because the loan typically comes with a lower, or much lower, interest rate than you were paying.
With standard high-interest rates on your credit cards and other debts, it can take years to pay back all of your debt. But with a lower interest consolidation loan, paying off your debt, and improving your credit score, becomes a much more attainable goal!
Common Mistakes to Avoid
A downside to consolidating your debt is that many people are so eager to get the ball rolling that they make costly mistakes.
Or, they forget about all the stress they previously endured and slowly slip back into old habits.
Here are some examples of these missteps that you should avoid:
Not Comparing Multiple Loan Offers
When you decide to go ahead with debt consolidation, the idea of only having one single debt payment with lower interest can be exciting; especially if you have reached a point where your debt has become completely overwhelming and unmanageable.
Due to this feeling of urgency, many people are often quick to accept the first debt consolidation loan offer they receive, leading to higher interest rates and less than ideal terms.
It’s important to shop around and explore multiple loan options from different lenders. This will allow you to make an informed decision and find a loan that has the best possible interest rates and terms.
Continuing to Use Your Credit Cards
After consolidating your debt, it’s crucial that you avoid adding more debt to your credit cards. Focus on paying off your existing debt.
Try to use cash or your debit card only when making purchases, and always be sure that you are making payments towards the balance of your cards each month and not adding new charges. If you do have to use your credit cards, make sure to pay off them in full every month.
Getting a Home Equity Loan
Paying all credit card and personal debt, with one single home equity loan, can seem like a great idea. But, keep in mind, this is essentially just converting your unsecured debt into secured debt, putting your house at risk if you miss payments. It will likely also take much longer to pay off the debt, perhaps as many years as it takes to pay your mortgage off. Therefore, dramatically increasing the total interest paid.
Not Automating Your Payments
Missing payments can be incredibly detrimental, as it often results in an expensive late fee, and it can adversely affect your credit rating.
In order to prevent missed payments from occurring, set up automatic payments through your bank.
This will allow you to set it, forget it, and avoid missed payments.
Not Reducing Living Expenses and Overhead Costs
While debt consolidation can help you pay down your debt quicker and more easily, it’s important to get to the root of the problem and address the issues that got you into debt in the first place.
This means cutting down on your expenses and setting a budget to keep yourself on the straight and narrow. And, as mentioned earlier, avoid taking on additional credit, ensuring you only use cash or a debit card for making purchases.
Also set up an emergency savings fund to cover large, unexpected expenses so you can avoid having to use credit. We suggest at least $1,000 be saved for emergencies.
Confusing Debt Consolidation with Debt Settlement
Consolidating credit cards – even with a debt management program – does not get rid of your debt. The opposite, in fact.
You need to ensure that you continue to make all required payments in order to minimize damage to your credit rating. If you cannot pay your debts, or consolidation loan, there are other avenues available – such as a consumer proposal or bankruptcy.
While debt consolidation can provide great relief for people struggling with numerous debts, it’s important that you understand the steps you need to take to ensure debt payment success.
Make sure you are well informed when it comes to debt management and consolidation. Be sure to meet with a Licenced Insolvency Trustee (LIT) to help you assess your options. LITs are highly trained, objective and regulated professionals. Most LITs will provide a free consultation.
Baker Tilly Ottawa Ltd. is a Licensed Insolvency Trustee. Its professionals have assisted thousands of individuals successfully resolve their debt crises and overcome financial turmoil since 2002. Its passion – its mission – is your health and well-being!