6 Things to Know Before Taking a Debt Consolidation Loan

It’s a common issue for many people globally: you find yourself in far too much debt and owing to several different lenders. You might have four credit cards, a student loan, car payments, mortgage payments and perhaps, even a line of credit. While it is easy to see how the idea of consolidating all of your debt into one loan is very attractive, there are some things to consider and to know before taking a debt consolidation loan.

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Debt Consolidation Loans Fix the Symptom, Not the Illness

Most of the time, when someone is looking for a debt consolidation loan, they are ignoring the cause of the problem. Typically, it’s because spending has gotten out of hand, and consumers are looking for a quick fix to a major issue. It does not address the true cause of the problem: overspending.

The most effective long-term solution is to replace your old spending habits with new ones. Keep track of your budget and spending. Also, keep track of your needs and wants, as this will give you some real insight into your excessive spending and how to avoid this issue in the future.

Make Sure to Research Your Options

There is a plethora of options available for debt consolidation, including a secured loan, an unsecured loan, transferring existing debt to a new line of credit, or even transferring your debt onto a credit card that offers 0% balance transfers. These are the most typical ways that people will try to consolidate their debt.

There is also, however, the possibility of doing debt settlement. That is, paying a lump sum to settle an outstanding debt for less than you owe. Debt settlement companies will negotiate with your creditors on your behalf and charge a fee accordingly. Beyond that, there are also debt management plans, which are agreements between you and creditors using a third-party nonprofit credit counseling organization. Here, the aim is to lower your interest rate for a longer repayment period, giving you some relief.

Make Sure You Are Consolidating the Correct Debt

Not all debt is going to be equal. Unfortunately, some people exasperate their debt situation when they roll over all of their debt into one account, forgetting to take into account some of their low interest rate debts. This causes them to pay more for these debts over the longer-term. For example, student loan debt is typically low interest rate driven, and therefore isn’t going to be a good candidate for a debt consolidation loan, as you will wind up paying more interest on that debt. As a general rule, consolidate your high-interest debts only.

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Ensure You are Using the Correct Debt Settlement Professional

The debt settlement industry is much like any other one, with many options available. It’s an industry that is known for being aggressive and shady at times, so it is vital that you are cautious and selective when choosing a debt settlement professional to work on your debts.

To put it into perspective, there are multitudes of reports of overly aggressive debt settlement professionals who withhold payments from creditors for extended periods of time in order to force them to ‘come to the table.’ While this could work, there is also the danger of damaging your credit score even further.

Make sure that you check with the Better Business Bureau before choosing your professional. A reputable consolidator will also be able to advise you on managing a budget, helping you to avoid problems in the future.

Interest Rates Can Change

Much like any other debts, interest rates on debt consolidation loans can change over the longer-term. Without a fixed APR (annual percentage rate) on your loan, you could find yourself in more trouble down the road. Make sure to read the terms of the loan agreement carefully and if it is possible to get a fixed interest rate, ensure this is the most effective solution for you.

Consolidation Means an Extended Debt Period

When you consolidate your debts, you are essentially lowering your monthly payments. While this might help you to manage your debt payments more efficiently, you are in fact extending the loan period. Extended terms mean that you pay more in the end.

While your debt will stay with you longer, in the end, it is more palatable being in debt rather than having your credit destroyed. In a perfect world, you will be looking to settle your debt as quickly as possible, but obviously, your situation will dictate the possibility of this.