Debt consolidation is a process by which consumers can take out a new loan to pay off the rest of their loans. The idea is to use the money from the new loan to pay off the debt and interest on all of the smaller loans. That means the new loan will have to be significant enough to cover the rest of the money debtors owe plus interest.
There are several types of financial institutions that offer debt consolidation loans, including traditional banks, credit unions, and other lenders. Taking out this type of loan allows consumers to reduce their debt repayments to one monthly sum and often reduce their interest payments.
The Problem With Debt Consolidation
While a debt consolidation loan will make readers’ lives easier and may reduce the amount of money they owe in interest, it won’t magically solve all their financial woes. Those who are prone to overspending will only begin to accrue more debt. Read on to find out about a few pitfalls to avoid.
Excessive Credit Card Spending
Although the responsible use of credit cards can help consumers improve their credit scores, poor management will only lead to more debt. It’s important that readers live within their means and track all of their payments carefully. Following a pre-determined spending plan may help to ensure credit card debts are kept to a minimum.
Limit Monthly Expenses
There are some monthly expenses that can’t be avoided, such as rent and utility bills. Try to be creative in coming up with ways to reduce other expenses, though. Reducing food expenses by cooking at home instead of eating out, taking public transportation or carpooling to work instead of driving, and shopping for less-expensive insurance policies can all help.
Build an Emergency Savings Fund
This may seem counterintuitive, but consumers often wind up saving money in the long run by putting it aside now. Try to put aside money that isn’t needed to pay off existing debts or unavoidable expenses each month to use as a source of funds should a serious emergency arise. Readers who are still feeling overwhelmed by their debt can also get more help online for getting back on track.