There are debt consolidation realities that you should familiarize yourself with if you want to use it to successfully get out of debt. Consolidating your debts can improve your finances but you have to make sure that you are doing it correctly.
This is true regardless of the type of debt relief program that you will choose. You have to get to know what you are using as a debt solution because that will help you make the right choices. For one, your knowledge will help you determine if you are making the right choice. As effective as it is, debt consolidation is perfect for a specific financial situation. For instance, if you cannot afford to pay all of your debts because your income has been compromised, then you cannot consolidate. You need to have a sufficient income to pay off every single dollar that you owe.
Knowing about the debt solutions will not only help you make decisions, but it will also help you avoid the common mistakes that can eventually compromise your financial progress.
Debt consolidation realities to know
If you are serious about using this particular debt solution, you need to keep in mind these three debt consolidation realities.
You could be tempted to spend again
First of all, you have to keep in mind that debt consolidation does not pay off your balance. It is true that you pay off your multiple credit accounts, but the money you used to pay it off is another debt. In reality, you still owe the same amount of money. And depending on the interest rate and repayment period of the new credit account, it is possible for you to owe a little more than what you used to.
So if you paid off your credit card debts with a debt consolidation loan, there is a huge temptation to use them again. After all, they now have no balance in them. If you do not control yourself, you might end up using the cards again. According to reports, Americans are increasing their spending – around 5% higher than last year. If you follow this trend, then you will be in trouble. Make sure you keep your spending low while you are still in the midst of a debt consolidation program.
Smaller monthly payment can mean longer repayment schedule
Another one of the debt consolidation realities that you need to keep in mind is the relationship between your monthly payments and the repayment period. Some people opt for debt consolidation because they want a smaller monthly payment. They want to have more room in their budget and lowering their debt payments seems like the best way to do this. Fortunately, debt consolidation can make this happen. However, you have to realize that a lower monthly payment would mean being in debt for a longer time. If you are about to retire, this can pose a problem for you.
Interest payment could add up the longer you repay your loan
When you have to pay over a longer repayment period, you will end up paying more on the interest of the debt. According to reports, the Federal Reserve continues to increase the interest rate. That will soon affect the interest on your current debt – especially if have an adjustable-rate loan.
Try to weigh what is more important – to save money or have a less restricting budget? If you want to have more room in your budget, then go for a longer repayment plan so you can lower your monthly payments. But if it is more important for you to save, then you should opt for a shorter repayment period with a higher monthly payment.
How to make the most of your debt consolidation loan
If you want to be successful in getting rid of your credit problems, you need to keep all three debt consolidation realities in mind. Only then will this become the perfect debt solution that can improve your financial situation.
Apart from these realities, here are other tips that you need to follow if you want to really achieve freedom from debt.
Do not miss any payments
You can actually hit two birds with one stone if you stick to your payments. You will slowly but surely get yourself out of debt and you can also work on improving your credit score. Even if your credit history was damaged by your huge debt balance, it can get better. As long as you pay off your dues on time, it will leave a huge positive effect on your credit report.
Make aggressive plans to save for your future
If you can manage it, keep on saving for your future. Some people think that they have to choose between paying off debt or saving for the future. Well, the truth is, you do not even have to pick one. You can prioritize paying off all your debt obligations but surely, you can put aside even a small amount to save. It does not have to be a big amount. You can save a small amount and that is okay – as long as you do not stop with your efforts. That small amount will soon grow to be a significant amount.
Learn from your mistakes
Finally, you really have to learn from your mistakes this time. It does not matter if you keep all the debt consolidation realities on top of your mind. If you cannot learn from what you did wrong in the past, then there will be no hope for you to ever improve your financial position. So identify the mistakes you made and stop doing them. Only then will you really be able to conquer your debts and achieve freedom from it.