Debt consolidation is almost always a savvy financial move. But with that said it comes with several missteps that are easy to make. Here’s what to avoid if you want your debt consolidation plan to pay off.
1) DO NOT even THINK about leaving your credit cards open (not even one)
This is the most common mistake that debtors make and we can’t stress this enough – do not, under any circumstances, leave a credit card account open for use. There’s a reason that you got into debt, and the same temptations will remain.
Remember – you’ve been approved for as debt consolidation loan this time, but next time – with bigger debts – you may not be as fortunate.
If you must leave a card open, consider leaving it with a trusted friend or family member, and restrict the credit limit to under £500.
2) DON’T opt for lending that runs over a longer period than necessary
When researching your loan options, it can be easy to opt for a solution that runs for a longer duration and offers the lowest repayment. However, it’s well worth paying attention to how much this longer time period is going to cost you in terms of pence and pounds.
For example, if you borrowed £10,000 over 3 years at 3% then the loan repayments would be £290.63, and the total interest repayable would be £462.68. However if you chose the longest term of 5 years the repayments would drop to £179.50, but the interest would increase to more than £770 total repayable.
This means that you won’t only pay more interest, but you’ll also be repaying the debt for far longer, which could impact your future plans – such as saving for a house deposit, going on holiday or expanding your family.
3) DON’T consolidate ‘cheap’ debt
Let’s define what we mean by ‘cheap’ debt – this includes debts that enjoy a low interest rate. The ultimate goal of debt consolidation is to cut down the interest that you’ll pay, and although the single payment can streamline your financial admin, it’s not usually worth the cost of paying a higher interest rate.
It’s also worth finding out whether you could qualify for a 0% balance transfer card for your credit card debt (start with MoneySavingExpert’s best balance-transfer page), and use a personal loan for the remainder of your debts.
4) DON’T get a secured loan
You may be considering getting a secured loan, our best advice is – don’t. In all but the rarest of instances it’s usually not the best way forward, here’s why…
- If you encounter financial difficulties, such as losing your job or suffering an illness, you may quickly find that your property or vehicle is at risk.
- If you need to claim benefits you’ll receive a limited amount of assistance for the interest on your mortgage, however any secured loan won’t be covered.
- If you have to borrow from a lender that exclusively covers those with a prior credit record you may experience an interest rate hike part way through your loan.
5) Avoid, avoid AVOID costly debt consolidation loans designed for ‘bad credit’
If your credit history is less than perfect you may have fallen hook line and sinker for a loan provider that is verging on being dangerous, such as a Payday loan, or even a loan shark.
In the best case, you’ll be repaying interest rates of between 40 – 50%, and in the most serious, you could end up being threatened or even physically hurt by organised criminals.
Ultimately credit products with such high interest rates will almost certainly worsen your financial situation, and at this point you need to pause and consider your options. If your circumstances are truly so bad that these are viable options, you should read our debt solutions page before going any further.