There are some great debt consolidation solutions available to those looking to improve their financial situation.
But before you take that step, here are seven traps to avoid when consolidating debts.
1. Not dealing with the underlying problem
Often, debt is built up over time and it can be hard to identify or come to terms with what has caused your debt problem. Seeking financial advice from a financial counsellor is a good first step to acknowledging your financial situation and understanding how you came to be unable to repay your debts.
2. Not having a financial plan
Without creating a financial plan, you are likely to continue your previous borrowing patterns and may end up in a worse position. Debt solutions form part of a financial plan to help individuals manage their debt more effectively and work towards becoming debt free.
It’s also important to establish a sustainable budget for your lifestyle, so that you can meet your financial obligations and enjoy life without turning back to debt.
3. Taking on new debt too soon
If you transfer your credit card balances onto a new loan, you may be tempted to put new debt onto those now-cleared credit cards. Not only will this push you further into debt, it’s important to consider the implication this will have on your credit score.
4. Consolidating the wrong debts
You don’t necessarily need to consolidate all of your debts. Indeed, it may be wise to leave a loan with a great interest rate out of your debt consolidation plan, and only consolidate the debts that will move you to a better rate and put you in a better financial position overall.
5. Not considering other options
Consolidation isn’t the only debt relief solution available. Other options include contacting your credit providers to negotiate new repayment plans, transferring your credit card balance to a lower interest rate card, taking out a secured or unsecured loan, or even a Debt Agreement.
If you are struggling with mortgage repayments, you may want to consider selling your property. You may even end up with money left over to repay other debts.
6. Not shopping around
Be wary of refinancers who make unrealistic promises about getting you out of debt. Research all options available, as well as providers. There are brokers and lenders who take advantage of people who are financially vulnerable, arranging a refinancing agreement that has unaffordable repayments, as well as high fees – sometimes more than 20% of the equity in their home.
Other red flags you should look out for, include brokers who ask you to sign blank credit applications, don’t discuss your financial situation in depth before arranging a loan, or don’t explain the fees, charges and repayments that apply to the loan before asking you to sign up.
7. Paying more than you need to
Consolidating debt can work if it means you are paying less in fees and interest. While you are exploring providers and loan options, look out for and compare interest rates, fees and charges.