As you’re considering your debt elimination option, you may find you’re a candidate for
consolidation. This process typically entails taking out a loan to pay off other debts. Some
people choose to go this route because it’s simpler to make a single monthly payment than it is
to juggle various balances — there’s less room for something to slip through the cracks. People
who qualify for loans with competitive interest rates may also pay less in the long run on a
consolidation loan than high-interest credit card debts or medical bills.
But, as with any debt relief strategy, successful debt consolidation is never a guarantee. You’ll
want to avoid these four things capable of derailing consolidation outcomes.
High Interest Rates
Repaying a loan with a lower, fixed interest rate tends to be less expensive than repaying credit
card balances with high interest rates that may change over time — but not always. The
interest rates borrowers secure through debt consolidation programs depends on their credit
scores. Before you start applying for loans, look over your credit history to make sure all the
information is correct so you have a good feel for your credit standing.
Calculate how much you expect to spend repaying back the loan with interest against how
much you’d pay to eliminate your current debts with interest. If you’ll save money with
consolidation, it may be worthwhile to proceed.
It’s impossible to see the future. But taking a loan is a commitment you can expect to live with
for months or even years to come. Defaulting can be both costly financially and damaging to
your credit score, so it’s important to plan ahead. If a loss of income were to occur, do you have
an emergency fund that could cover your payments until you started earning again? Hopefully
this will never come to pass, but it never hurts to be doubly prepared before borrowing money.
Long Repayment Terms
It can be tempting to lengthen the repayment period on a loan in an effort to lower the amount
of your monthly payments. But it’s important to consider the implications of doing so. Can you
commit to making timely repayments in full for years to come? And, will you end up
paying more in interest than you would have paying down your debts aggressively on your own?
It’s generally advisable to find a healthy balance between the amount of your monthly
payments and the amount of time you’ll be repaying the loan, rather than trying to stretch it
out for additional years because it seems easier at face value to make smaller payments.
Accumulating New Debt
As Bankrate notes, one major risk of debt consolidation is “it can free up ‘space’ for consumers
to rack up even more debt.” It’s counterproductive to accumulate new debt while you’re
working down your old debts, but it can be very tempting to do so. Borrowers can get into
trouble if they find themselves trying to pay off a loan and mounting additional credit card debt
at the same time.
It’s important to commit to changing your spending habits for the duration of repayment and
beyond. Slipping back into your old ways will only leave you in the same situation as before.
Yes, debt consolidation has helped many people streamline their debts and pay them off with
less interest. However, it’s important to be aware of these risks, too.