Debt consolidation dangers are real. Even if this debt relief strategy is effective, it still poses certain risks that you have to be aware of. Failure to understand these dangers might lead you to make your debt situation worse. When that happens you can bet that your stress levels will probably skyrocket.
According to reports, 1 out of 3 workers admitted that their debt payments are causing them stress. That stress can cause a lot of negative effects in their lives – from broken relationships to critical ailments. Unless you can get rid of your debts, you will never feel free from the worry that comes with having too much debt to pay off.
Fortunately, there are various ways to get out of debt. The challenge for most consumers is finding the right debt solution that fits their specific financial position. One of these is debt consolidation. But to maximize the effect of this debt relief program, you have to know both the pros and cons of using it. Some people just dwell on how it will help them get rid of debt. While that is important, it is also vital for your success to know the pitfalls as well. At the very least, knowing the disadvantages will help you avoid the dangers that might compromise your debt freedom.
3 debt consolidation dangers that can threaten your finances
Understanding the debt consolidation dangers will help you identify when it is becoming a threat to your finances. If you can identify the signs, you can avoid it and keep it from destroying your debt relief progress.
So what are the dangers that you need to be on the lookout for?
Adding more to your debt
The first is adding more to your debt balance. This can happen in many ways. In one scenario, you will borrow a loan to consolidate multiple debts. Instead of borrowing only what you need, you will loan a bigger amount so you can spend it on a vacation or something unnecessary. This simple act is successful in consolidating your debts but it also grew your balance because you did not stick to the amount that you need.
In another scenario, you also borrow a debt consolidation loan that you will use to pay off your high-interest credit card debts. This means all your debts will be under that one loan. It should make things easier to pay it off since you only have one debt to think about. But there is a danger in all the credit cards that now have 0 balance. It can be tempting to use them again. If you give in to the temptation, it can lead you into mountains of debt.
These are only a few of the ways that consolidating debts can increase your balance. This is why it is very important to exert strict rules with how much you should borrow. Not only that, if you need to keep a tight lid on your credit use while you are still paying off what you currently owe.
More expensive repayment
Another one of the debt consolidation dangers that you need to avoid is paying too much on the repayment. Admittedly, some people will really choose to pay more on the overall debt because they want to make fewer debt payments each month. This will result in a longer repayment period and more interest payments.
While this is acceptable, there are ways for you to lower the amount you have to pay. First of all, make sure that you get a lower interest rate. If you will end up paying a bigger interest rate then it does not make sense to consolidate.
If you really want to lower the overall debt that you will pay then it makes sense to negotiate a lower rate, get a short-term loan and make bigger monthly payments. This will not just help you save money, it will also get you to debt freedom immediately.
The last of the debt consolidation dangers is the risk of losing an asset. This is mostly for those who have chosen to use collateral when consolidating debts. Apparently, this is a popular strategy for homeowners who have a lot of debts to pay off. Experts reveal that one of the uses for a home equity loan is to consolidate debt. They use the equity that is already available – since it is already theirs. Not only that, it allows them to get a very low-interest on the loan they will use.
But this is not the only way you can risk an asset. You can also borrow from your 401(k) and use it to consolidate debt. It is also your money already. Your debt payments will now be towards your own retirement funds. While this works just like a home equity loan, it also poses a risk on your financial future.
The risk here is when you fail to pay back the consolidated loan. You can lose your home or your retirement fund. Both of these are not acceptable if you want a stable and secure financial position.
How to avoid the effects of debt consolidation dangers
While the debt consolidation dangers are a cause for your concern, that does not mean you should keep yourself from using it. You just have to be careful with your choices so you can be sure that it will only improve your finances. Here are some tips that you can use.
Choose the right debt consolidation strategy
First of all, you have to make sure you have chosen the right debt consolidation strategy. You have several options: debt consolidation loan, balance transfer card, debt management, etc. It is important to consider your financial situation before you make a choice. That way, you are sure that you can afford your payments. Not only that, you want to choose a debt solution that will help you get one step closer to your financial goals. For instance, if you want to buy a house after paying off your debts. You need to find a debt relief strategy that will help you save money and improve your credit score at the same time.
Align it with your budget plan
This is an important budgeting tip while in the midst of a debt consolidation program. It will ensure that you will always have the funds to pay your debts. It will make your payments secure and help you avoid the debt consolidation dangers that might ruin your financial progress. Try to stick to this budget so you will never compromise your monthly payments.
Make smarter credit choices
Ideally, you should keep yourself from using credit while you are still paying off the existing balance that you have. But if you have to, it should be done wisely. If it is not an emergency or an absolute necessity, you might want to skip using credit. And even if you complete your debt payments, do not jump in and use credit immediately. Try not to be reckless about it so you will not land in another tough debt situation.