Most people opt to consolidate multiple debts by borrowing a loan to pay it off. While this may seem like a logical and effective way to get out of debt, it is not always the perfect solution for everyone. When you consolidate debts like credit cards, using a low-interest loan can really help you save money on the overall payment of the debt. However, you should also consider your current financial situation.
Can you really afford to pay back the loan? Or will your payments be compromised as well? Will you end up accumulating more debt in the process?
Make sure that if you decide to use a loan to consolidate multiple debts, you should understand what is at stake. You need to get to know the signs that it is not a good debt solution because you do not have the right personality nor do you have the perfect financial situation for it.
4 reasons not to borrow a loan to consolidate multiple debts
There are 4 different reasons why you should not use a loan to consolidate your multiple debts.
You have a bad credit score
When you apply for a loan or even a credit card, you need to have a good credit score. This will ensure that you will get a good interest rate and loan terms. This can help you save money on the overall amount that you will pay on the loan. While reports reveal that the average FICO credit score is currently high, this is not consistent across different generations. According to statistics, only those that are aged 50 and above have a credit score of 700 and above. The younger generations have a range of 652 to 685 credit score.
If you are young and you have a low credit score, you might want to work on improving that before you proceed with the debt consolidation loan. Push it back for a couple of months or opt for a different debt solution.
You really need a debt reduction
Sometimes, people fail to realize that what they really need is a debt reduction. They do not want to admit that they lack the financial resources to pay for the whole debt. When you consolidate multiple debts into a loan, you are not paying anything yet. You just shifted it around so it is all under one credit account. You still have to pay the same amount of debt. If you know that your income (or the lack of it) will make it next to impossible to pay the whole debt back, then just admit that you need to reduce your balance. Do not force it if you cannot afford it. You will just make things harder for yourself.
You do not have a stable source of income
The truth is, your income will play an important role in your loan application. So if you cannot prove that you have a stable source of income, it will be very hard for you to get a loan approval. Sometimes, you can have a bad credit score and still be approved of a loan. Your income is the main source of your debt payments. So if you cannot guarantee that you can pay the loan back, you will just be wasting your time applying for the loan. You might be better off using a different debt payment strategy.
You are not yet done borrowing money
Finally, you should not consolidate multiple debts using a loan if you are not yet done borrowing in the first place. Sometimes, people have a current medical condition that requires them to spend a lot of money. If their cash falls short, they end up borrowing money to make up the difference.
You need to keep your borrowing down if you really want to be debt free. If you have to, lower your monthly expenses so you have extra to use. According to reports, Americans have been saving less and borrowing more even if the income has risen over the years. If you really want to make your consolidation efforts work, you need to make sure that you put a stop to your borrowing. If you cannot do this, then do not consolidate multiple debts for now.
Sometimes debt reduction is better
Without a doubt, a debt consolidation loan is a great solution, but it is not always the right one for everybody. If you know that your income is not stable enough and what little you get is not sufficient for your debt payments, then you might be in need of debt reduction.
There are two things that you can do to reduce what you owe. You can negotiate for a really low-interest rate with the creditor or lender. Some people are not aware that this is something that they can do. You just have to be honest with the creditors about your financial position. As long as you can prove that you are sincere in wanting to pay off your debts, they are always willing to work with you. After all, it is preferable than you declaring for bankruptcy.
Another option is to really negotiate the balance that you owe. Debt settlement involves negotiating with the creditors and lenders to allow you to pay only a portion of your debt. You will be paying a lump sum amount and anything that will not be covered will be forgiven. This is one of the best ways to really lower your payments. Make sure that any agreement will be documented before you send your lump sum payment.
Consider these options instead of forcing to consolidate multiple debts when you know that it is not what you really need. This is why it is important for you to get to know your options. It helps you make informed decisions that will ultimately lead you towards debt freedom.