Published on August 13th, 2014 | by Pete1
6 common debt consolidation loan mistakes & how to avoid them
A debt consolidation loan can for some people be an efficient and effective way to deal with a number of debts. Typically, you borrow enough money to clear all your pre-existing debts, leaving you with one monthly repayment to make, rather than several. As well as being easier to manage, you should also find that your monthly repayments are reduced because the new loan should have a lower interest rate than your previous debts. However – there are a number of common debt consolidation mistakes you need to be aware of which could either hinder your application or prove to be costly down the line.
1. Preparation is key
It is so important to be properly prepared before you complete your application for debt consolidation. This means you must decide exactly how much money you either need to borrow or you should know the total amount your debts come to. You will also need to gather evidence of all your existing debts so that you can prove that you are asking for the correct amount. Don’t forget that a recent tax return and pay slip is also needed so that you can show exactly how much you earn.
2. Check your credit rating
Check your credit file before you apply. Keep a copy of your credit reference file from one of the three leading UK credit reporting agencies — Experian, Callcredit and Equifax. A copy will only cost you £2 and will list all your current debts. The lender or debt consolidation company will also see a copy of your credit reference file and may turn your application down if it is clear that you have a great deal of unmanaged debt. Of course, there may be errors on this document, so it makes good sense to check it for any mistakes, you can then inform the credit reporting agency so they can investigate it. Get any errors rectified before you apply.
3. Calculate repayments
If your application is accepted by a loan company, calculate exactly how much they are charging you in costs before you sign the agreement. How much interest is being charged, and what are the administrative charges such as the brokerage and insurance fees? Ask for a detailed breakdown, and if the costs seem high, ask for a reduction before you agree to take out the loan. Debt consolidation companies have become even more transparent about any fees or charges for debt consolidation services they offer and these should be easily visible on their website, along with a clear breakdown which is easy to understand.
4. Choosing which debts to consolidate
The main objective of debt consolidation is to save you money and make your repayments much simpler. If you are applying for a loan then make sure you consolidate all your high-interest debts – not just two or three of your most expensive loans. It makes sense to consolidate every debt that has a higher rate of interest than the consolidation loan. If you are unable to get a debt consolidation loan then ensure the debt consolidation company is aware of all your unsecured debts.
5. No more credit
Make sure you destroy your credit cards and close the accounts after you have consolidated these debts. It is incredibly easy to make the same mistake all over again and build up high credit card bills once more. If you do not destroy them, you may find yourself not only paying back your debt consolidation company or loan, but also new credit card debts. If it is unavoidable then keep one credit card for emergency use only and cancel the others so that you can avoid temptation. Consolidating your debts means a new beginning and it will take planning and commitment to reduce your debts – but it is possible.
6. Secured vs unsecured
Always remember that if your loan is secured against your property, you could be putting your home at risk if you find yourself unable to meet your monthly repayments. Do your calculations very carefully to ensure you can afford the loan before you sign up for it. If you are not totally confident that you can maintain the loan repayments then speaking to a debt consolidation company to find out about other ways you could clear your debts is a better option.