5 things to remember when taking a Debt Consolidation Loan
As we have previously discussed, debt consolidation is a handy way out when you've piled up a litany of debts. However, as we also noted, it has its own pitfalls. In this feature, we shall go into some detail about how you can avoid them:
Consider all your options
The prospects pitched by debt consolidation are tempting enough that many jump at the chance without taking time to evaluate all the options on offer to them. Given the high level of stress one faces after having piled up a stack of debts, this is understandable. However, it's worth considering the options because one of them will suit your situation better than the others.
Debt consolidation loan: Signing up for a secured debt consolidation loan or unsecured personal loan with the bank or other financial institutions.
Balance transfer: This involves transferring all your credit card debts onto a single low-interest (as low as zero per cent) credit card.
Personal line of credit: This requires you to open a line of credit to pay off the entirety of the debt that you have incurred
Isolating the primary reasons behind your debt
While debt consolidation might offer a linear path towards the first step of going fully debt-free, it is ultimately just a band-aid for a wound that you need to know how to avoid suffering in the future.
This means isolating the factors that led to the gradual swelling of your debt, change your ways and make the necessary changes to avert a similar outcome again.
Start off by studying your going over your past expenses with a fine toothcomb, such as your various bills, credit card statements, payment receipts. Then figure out where you're overspending and what you can cut down on. After you've pinpointed these things, start anew with a budget in mind, and ensure you maintain the necessary self-discipline to practice it.
You've still got to pay off the debt consolidated loan - Figure out how
Okay, so you've managed to consolidate your debt and are hopefully on your way to a debt-free existence soon. However, till then, there's the very real threat of not being able to pay off the loan consistently.
Merely making the minimum payments won't cut it this time around. It will only extend your repayment, during which you could stack up even more debt.
That's why you first need to decide what portion of your funds you can set aside for repaying the debt. For this, planning a budget revolving around set repayment amount would help. Apply the emergency brake on all non-essential expenditure and use any extra funds you may come into, such as bonuses, refunds, or even a secondary source of employment, towards paying the debt.
Avoid returning to uncontrolled spending
Consolidating all your debt frees up a fair bit of money. At least that's how it seems. But remember those funds are there to help pay off your loan and tide you over while you make changes to your spending habits.
The first step towards that new approach is curtailing your spending as much as possible. Hide your credit cards and avoid using them till your debt is paid off. However, do avoid closing out your credit cards altogether - especially your oldest cards - as the subsequent credit length reduction will impact your credit score adversely.
Avoid a long repayment tenure
We get it. When you've landed up in a sea of debt, funds are going to be tight. However, that doesn't mean a longer repayment tenure for your debt consolidation loan is a good idea. That's because you will end up paying more over time by way of interest.
Before you settle on a debt consolidation loan, compare the repayment terms of each lender and pick the one with the shortest tenure.
Of course, if you're acutely short on funds, you may have no choice but to opt for a longer repayment tenure.
At mPokket, we firmly believe loans should be available at the drop of a hat, when you need it most, particularly students and young professionals whose dreams and aspirations are at a budding stage.
However, we also believe in fostering a sense of responsibility when it comes to paying off debts. To that end, we offer flexible repayment options that let you decide your own repayment schedule. We also offer incentives for timely settling of dues, such as raised credit limits and mCoins. This applies to both student loans as well as loans and salary advances for young professionals. So don't wait, download the app now and take an instant loan after a quick, hassle-free and paperless process.