Debt Consolidation 101: 3 Mistakes to Avoid (Part 3 of 3)
If you’re thinking about consolidating debt, here are some pitfalls you should avoid.
In case you were wondering, there’s no silver bullet that can magically kill your debt all at once. (Okay, maybe winning the lottery, but that’s pretty low on the list of advisable strategies.) Paying down your debt takes time and perseverance. It’s about making your payments month after month after month until the debt monster is finally slain.
Consolidation can be a great tool for getting your debt under control. By taking out one larger loan to pay off your smaller loans and credit cards, you can simplify your payments and even save some money. Depending on the terms of your new loan, lower interest rates and lower monthly payments can help you gain some breathing room.
But debt consolidation is not without its risks. If you’re thinking about consolidating your debt, here are some things to keep in mind:
1) Longer terms can mean increased costs.
In part II of this series, we talked about how getting a consolidation loan with longer terms can lead to lower monthly payments. The math here is simple, the longer you have before the loan has to be repaid, the less you have to pay each month in order to get there.
When you’re trying to get out of debt, you’re trying to save money, not spend more of it. If you’re looking to consolidate debt for the sole purpose of getting a lower monthly payment, be aware of the money you’re saving each month so you can actually save it.
2) Secured Loans: lower rates, higher risks
If you are a homeowner, there is likely going to be a difference between how much your home is worth and how much you still owe on your mortgage. (It helps if housing prices have gone up since you bought.) When a person owes less on their home then it’s worth, they can usually take out a home equity loan or line of credit in the amount of that difference.
These financial tools can help people pay for repairs or renovations to the house or even pay for a child’s college education. They can also be a great way to consolidate debt, because the interest rates are far lower than traditional loans. That’s because these loans are “secured” loans, which means that they are backed by collateral: in this case, the person’s home.
But there’s a downside to this arrangement, and it’s what happens to the collateral if the loan goes into default (meaning the borrower stops making their payments). If the loan goes into default, then the collateral gets seized by the lender. In the case of a home equity loan or line of credit, this means the lender gets to seize your house and put it into foreclosure.
And this will happen even if you are up-to-date on the payments for your mortgage. Failing to pay back a home equity loan (also known as a “second mortgage”) has the same consequences as failing to pay back your original mortgage: they sell your house out from under you.
That’s a big risk to take all for the sake of refinancing your debt, so be very, very careful.
3) Remember: you still owe the same amount of money
Debt consolidation is a way to make your debt more manageable, but taking out a new loan doesn’t leave you with any less debt than you already had. It can make things easier, it can make your monthly payments cheaper, and it can even save you money in the long run. But it doesn’t take care of your debt all by itself.
Debt consolidation is kind of like wine, in that it’s best when paired with other good financial practices. Before taking out a debt consolidation loan, look at making a budget and cutting back your expenses. Maybe even see about taking on second, part-time job to increase your income.
Even if your new loan comes with a lower monthly payment, you can get yourself out of debt faster by paying more every month. Don’t pay more than you can afford, of course, but do take the time to look at how much you could really afford if you spent your money more carefully. You’ll probably be surprised.
There is no silver bullet for paying down your debt, but with a debt consolidation loan, you can at least tame it. Learn about the different types of debt consolidation that could be a good fit.
If you have high-interest, short-term payday loans that have you trapped in a vicious cycle of debt, try consolidating those loans with a safe, affordable personal installment loan from OppLoans. We offer loans from $1,000 to $4,000 with terms between 6 and 36 months and rates that are 70-125% less than other personal loans. Our fixed rates and regular payment schedule mean that you can pay off your predatory payday loans without busting your budget. For more information, or to apply for a loan today, visit our homepage or give us a call at (800) 990-9130.