With the growing number of people in debt, many seek to consolidate their debts into one loan with affordable repayments each month in order to manage their finances. This means that they take out one loan with which they pay off all their various credit cards, car loans, and any other debts and are left with just one loan to pay off, which should be much easier to cope with.
However, there are many pitfalls in doing this and many start out with good intentions but end up getting into an even worse situation. Here we outline the common mistakes to avoid and explain how you can make debt consolidation work.
The most common mistake people make with debt consolidation is forgetting that they are still actually in debt. With all their various credit cards and debts paid off, it is easy to feel that you are in a much more financially stable position and start spending on credit again.
By doing this, many run up additional credit card bills and get themselves into the same position which they were in before, except this time they have their debt consolidation loan to pay off in addition to these fresh credit card bills.
To make debt consolidation work, you have to change your behaviour and address why you were so badly in debt before. Ultimately, you must remember that you are still in debt, it is simply in a more manageable form.
To get your debts under control you must learn, in short, not to spend money that you don’t have. This could involve destroying those credit cards, refusing to buy on credit and not taking out any more loans until your current debt consolidation loan is paid off.
In order to have long term success in managing your debts, you must continually concentrate on minimising the amount you owe. Pay off as much as you can each month rather than the minimum and look forward to the day when you owe nothing.
When looking at your finances, take time to sit down and do the maths. Financial advisors have suggested that your outstanding debts should not constitute more than 36% of your gross monthly income. This includes all money owed, from furniture bought on credit, to car loans, to your mortgage repayments.
To work out if your debts are within this ratio, divide the amount of money you spend on paying off your debts and mortgage each month by your monthly income. Many are surprised to find that they are nowhere near this recommended ratio.
Debt consolidation is a great way to manage your finances and should be considered as a sustainable option. Just remember that for it to work, you must work hard to change your ways and treat borrowing with a different attitude.
By Carys Robshaw