Debt consolidation means combining different unsecured debts into a new single loan considered to be more favorable. It involves taking out a new loan, with the aim of paying off a number of other debts, and the new loan comes with a lower monthly payment or a lower interest rate or even both of them. This way, consumers can use the consolidation loan to get out of any type of debt that is not tied to an asset, such as: credit card debt, student loan debt or any other type of unsecured debt.
There are a few debt consolidation loan pitfalls that should be avoided:
• Focusing too much on the monthly payment - Many consumers perceive the monthly payment as being the cost of a loan. The actual cost of a loan is the interest that has to be paid for the loan every month. Some dishonest finance companies try to focus the attention of the customer on how much will be saved in the payment they make each month and, in this sense, they extend the term of the loan rather than to provide a lower interest rate. It is good to know that the best debt consolidation loans will always have a lower interest, a lower payment and will be scheduled to be paid off in less time. Read more here - http://www.toptenreviews.com/money/debt/best-debt-consolidation-companies/.
• Failure in paying attention to the loan terms – Clients are often desperate to find a way to stabilize their financial situation and they forget to analyze their loan agreements. However, reviewing the loan documents before signing them is essential. The documents can usually be received by email and reviewed at home, and in case you do not understand or agree to some of the terms, you can have them explained, renegotiate them or simply refuse to sign. Prepayment penalties, interest rate, payment adjustments or balloon payments terms should always be double checked.
• The lack of a debt management strategy – Consumers willing to improve a need for cash flow situation often choose consolidation loans. It is known that short-term fixes can lead to long-term financial problems, therefore, it is important for every consumer to consider, not only how to get the consolidation loan, but also how to pay it off.
• Failure to prospect the market - Consumers who are carrying excess consumer debt are normally busy. Therefore, before signing loan papers, it is advisable to check the rates on debt consolidation loans.
Debt-consolidation loans can be useful for responsible borrowers who have a plan for getting out of debt and know for sure that their income will increase, but will not help consumers who keep spending chaotically.