What is a Debt Consolidation Loan?
A debt consolidation loan is useful when you have multiple loans. The loan helps you to reduce your financial burden by prepaying all your loans through a new loan. This way all your loans are combined into a single loan and you are left to left only one EMI. But in a hurry to get debt free, people often end up making mistakes while availing of a debt consolidation loan. Avoiding such mistakes can make your finances more stable and worry-free. So, here are- Some of the common debt consolidation mistakes which you should avoid
Not knowing the root cause of your pilling debts.
A debt consolidation loan is a financial tool to get out of the debt trap. However, to eliminate the problem, knowing the root cause is a must. But if don’t bother to find out the root cause of how you ended with a mountain of debt, you may not be able to come out of this. So, the best thing you can do in this situation is- try to rectify the cause of the problem. Like what is the main reason which got you into debt.
To do this- find out the root cause of your debt:
- Go through monthly bills, credit card statements, receipts, and other expenses and create a detailed breakdown of your spending to figure out the culprit.
- Track your spending and see where your money is going.
- Once you’ve identified the reason, try to eliminate it as soon as possible.
Don’t shop around for Loans!
Again in a hurry to pay off the debts people, people opt for any of the debt consolidation loans without checking for it’s the long-term effect on the finances.
In order to avoid such mistakes, it’s important to compare all the available options. Here are some tips to do if more effectively:
- Balance transfer– You can go for a better loan deal with new lender by transferring your outstanding amount to a new loan account. The process is known as Balance Transfer and is very effective to reduce your debt burden.
- A personal line of credit– Opening a line of credit to pay off your unsecured loans/debts.
- Debt consolidation loan– Availing a personal loan at lower rates to pay off your existing obligations.
- The lower interest rate for debt consolidation loans– Go for a debt consolidation loan only when the loan is offered at a lower rate of interest.
Not having a proper repayment plan.
Even if you opt for a debt consolidation loan at a lower rate of interest, having a not proper plan can lead to trouble again.
Having a proper repayment not only defines how you will repay the borrowed amount but instead starts with planning for the loan amount which you avail through the new loan.
- Remember taking a loan is always easy, but the struggle starts when you start the repayment.
- Always borrow as per your requirement.
- Have a strategy to repay the borrowed amount.
- Even in the worst case, don’t default with the repayments.
- Save your bonuses and incentives for making part-payments.
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Don’t choose a shorter repayment tenure.
Through shorter repayment tenures are tempting as they end your debt burden faster. But this increases your EMI obligations. So, it may happen that paying a bigger amount as EMI may not be possible for you. This further leads to defaults and can also affect your CIBIL.
So, to avoid such conditions, opt for a reasonable tenure which makes your EMI affordable. If you want smaller monthly payments towards your debt consolidation loan, you may be tempted to choose a longer repayment tenure. Stretching the repayment process for a long time has a downside as you end up paying more on interest.
When choosing your repayment tenure, follow these tips: These are some common debt consolidation mistakes that can cost you more if not taken care of properly. So, try to avoid them to get out of the debt trap. Remember having a repayment plan and borrowing within your repayment capacity is the key to healthy finances.
Amrita Agarwal 