Here are our top 10 debt consolidation fails.
1. Consolidating all your debt into a mortgage and not being able to afford the new monthly payment.
Consolidating debt into one payment shouldn’t be taken likely. For many people reducing their total payment is a god send. But if you still can’t afford the lower monthly payment then debt consolidation should not be considered. It will only move the problem further down the line.
2. Not clearing all your debts with the new loan.
It is important if you are considering a debt consolidation loan or mortgage, to clear all your debt and close the accounts. This will ensure the loan remains affordable and the debt isn’t run up again.
3. Not realising unsecured debts will now be secured against your property.
This is a very important factor that can easily be overlooked. If you were unable to pay your unsecured debts, this wouldn’t affect your home. Once consolidated into your mortgage or secured loan, non-payment could result in the loss of your home.
4. Paying off your debts then running them up again.
Consolidating your debts into a mortgage or secured loan, then not closing the accounts and running the debts up again could spell financial disaster. Debt consolidation isn’t without its disadvantages and over spending again could affect your credit score and ability to borrow money again.
5. Not shopping around to get the best deal.
There are lots of options open to you. It is always best to speak to more than one lender or better still a mortgage broker that deals with more than one.
6. Not realising you could be extending the term of the debt and ending up paying lots more interest in the end.
You could end up paying more interest if you consolidate a 2- or 3-year loan into your mortgage that is 25 years long. If you are considering consolidating short term debts into a long-term mortgage, then maybe consider reducing the term of the mortgage to offset the extra interest.
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7. Not considering an unsecured consolidation loan.
When looking into a consolidation loan it is easy to overlook another larger unsecured loan. There are many providers and it could work out cheaper in the end.
8. Not addressing the root cause of the debt.
The are lots of reasons to borrow money but not all of them are necessary or good for us. If you are considering debt consolidation you should address the reasons for the debt and take steps to avoid a repeating pattern of overspending.
9. Not asking friends and family for help and advice.
Debt can be a taboo, but your friends and family could help. They may have been in your situation in the past and be able to help.
10. Not understanding how much you have coming in and going out each month.
Having a written income and expenditure each month or week will help you plan out your finances and make provisions for savings. This will ensure you stay ahead instead of falling behind.