You're up to your eyeballs in debt, like Stanley Johnson from Lending Tree, and your attempts to negotiate with your creditors has failed. Consolidating all of your debt into a single, manageable loan may make a great deal of sense and frankly may be your last resort to avoid bankruptcy. It sounds easy, but it's actually harder to get one of these loans than you may think, especially if it's from a reputable source. After all, who wants to loan money to someone who's about to sink? Yet, it does happen and it can be an effective strategy, but also a potential trapdoor to a slew of other problems and hiccups that could actually leave you worse off than you were to begin. Avoid these common debt consolidation mistakes when taking on a debt consolidation loan.
Reloading
A debt consolidation loan, under the right terms, can be a good thing. It can reduce the complexity of paying off multiple credit cards and often get you a more favorable interest rate. However, a debt consolidation loan is not a clean slate: The amount you owe is still the same, but it's simply restructured and, therefore, it can be one of the major debt consolidation mistakes. Many will use the fresh availability from the previously maxed-out credit cards to bring the problem back again -- or even make it worse. If you aren't careful, you could end up reloading yourself into a second loan or even bankruptcy. As soon as the consolidation loan is set up, cut up and close out all of your credit cards, except for maybe a low-limit, low-interest one for emergencies. You can likely request a lower limit if you feel you don't have the discipline. If you're concerned about how mass account closures will affect your credit score, just think that your score will be far worse with double the debt load.
Not addressing the real problem
Just because you've gotten a debt consolidation loan doesn't mean all is well and the problem is solved. Yes, in the short-term some pressure may be relieved, but many forget that a consolidation loan is not a solution to the underlying problem, it is merely a tool. Simply getting a new loan to perpetuate the problem will not work, and it will only get you into further trouble and is a debt consolidation mistake you need to avoid. To make the consolidation loan work, you must make real changes to your lifestyle and spending habits to avoid reloading. Take this time to identify why it came to this. Have you made poor business choices? Are your house and car payments taking too much out of your budget? Have you been living like someone making $500,000 rather than $50,000? Ask yourself these tough questions, get answers and implement real changes in your financial life to eliminate the problem at its root.
Forgetting hidden costs
Debt consolidation loans can be loaded with hidden fees and costs. In addition to the interest rate, which may not be great depending on your situation and credit score, make sure you read the fine print to see where your dollars are going. For instance, there may be an initial processing fee, a monthly service fee, a fee for each check sent to your creditors, and even penalties for paying the balance off early. If you find a great deal on a legitimate debt consolidation loan, take the time to know where your dollars are going. It can be very tempting to just take the deal without looking at the incidentals. You want to make sure every cent you send in goes toward servicing your debt and not administrative fees.
Getting in with a bad company
Being in financial trouble creates some very serious feelings of vulnerability and even desperation. The capitalists are aware of this and will often try to prey on your weakness. When seeking out a debt consolidation company, you should go to great lengths to verify the legitimacy and reputation of the firm. Contact the Better Business Bureau, ask for references, research websites that report scams, and check the public records for any pending litigation or lawsuits against the company. Companies that flood you with mailers, engage in high-pressure selling tactics or promise to eliminate your debt should be avoided. Getting in with the wrong company can cause all sorts of issues and problems, such as high fees or resorting to charge-offs with the creditors rather than paying off the balance in full. In the case of the latter, charge offs can have derogatory implications on your credit report and you may even be taxed on the portion of the balance that was not paid. A debt consolidation loan is a business decision, and although it is a tough one, you should receive the professional courtesy that comes from most legitimate client-service provider relationships.
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