Some financial experts will never recommend you to get a loan just so you can pay off your other debts. This does not mean the whole program is ineffective. Frankly speaking, it is effective but there are just too many pitfalls that could lead the debtor into more debt. So if you know all these pitfalls, you may find this to be quite effective – and the best part is, it hardly has an effect on your credit score.
Before we discuss the various things that could go wrong after your debt consolidation loan had been approved, let us define the process first.
In a debt consolidation loan, the consumer applies for a loan that is enough to cover the debts that they are allowed to pay off immediately. These include personal loans, credit card debt and medical bills. Student loans can also benefit from this debt relief option but you only get the loan from a government agency.
When you have defined the debts that you will consolidate, you apply for the loan. Once you are approved, you will pay off all the debts as you intended. Then, you will pay off the loan that you got. You now have a single debt to worry about. Things should have gotten a whole lot better – especially when your loan has a low interest rate. That means you have a lower monthly payment.
As effective as that may sound, you need to make sure that you will avoid certain pitfalls.
Let us start with the loan. If you got yourself in debt, that means control over money is not your greatest strength. Once you get a hold of the loan that was approved, the temptation to use it on something else will be very strong. You might be blinded by the big amount and thus make excuses and false justifications about purchases that you can make instead of sending it to your creditors for debt payment. This is wrong. Make sure that you pay off your debts immediately. If you need help with it, you can ask your spouse or partner to go with you when you get the loan. That way, someone can make sure that you go straight to your creditors to pay off your debts.
Another possible pitfall is the amount that you will loan. Only get the amount that you need – never more than that. Do not grow your debt more than it has to. It idea is to reduce your debt, not increase it. While this debt relief does not reduce what you owe like debt settlement, it will help you with lower monthly payments. But that is done not because you don’t have to pay off a part of your debts. That happens because loans oftentimes have a more structured debt payment with lower interest rates. Not only that, the interest is usually fixed – unlike more credit card debts that can increase their rates.
The last and probably the most dangerous pitfall involves all the credit cards that you paid off with your loan. Now that they are down to zero balance, there is the temptation to use them again and accumulate more debt. Do not give in to this temptation. It is better if you close off your accounts save for one. That will keep you from using them.
Ultimately, you have to learn your lesson. Make sure you understand why you got into debt and start making better spending choices. Live within your means and if you cannot control credit card purchases, don’t use them.