The 8 common mistakes borrowers make when consolidating debt
Debt consolidation can turn a pile of bills into one monthly payment, but simpler does not always mean cheaper. A consolidation loan, balance transfer card or home equity loan replaces existing obligations with a new one, and you should weigh the interest rate, fees, repayment period and your own spending habits before making the switch.If monthly expenses keep exceeding income, moving balances to a new account does not solve the underlying budget problem.A consolidation loan probably won’t help someone who continues to spend more than they earn unless that person cuts spending or increases income.A lower payment may simply mean the lender has stretched repayment over more years, which can increase the total amount of interest and fees paid.
The CFPB specifically warns that a longer term can make a consolidation loan cost more overall even when the required monthly payment falls.Fees can widen that gap.Personal installment loans may include origination, documentation, credit insurance, non-filing insurance and late fees, so borrowers should compare the annual percentage rate (APR) and total repayment cost rather than only the advertised interest rate.Many cards advertise a 0% or low introductory rate, but the promotion generally lasts for a limited period and a transfer fee usually applies.
New purchases on the same card can also be subject to different interest rules.Before moving a balance, calculate the monthly amount needed to eliminate the transferred debt during the promotional period, including the transfer fee.If that payment does not fit the household budget, the borrower could reach the end of the promotion with a remaining balance that is suddenly subject to the card’s regular rate.Think carefully before turning unsecured credit card debt into debt secured by a home.
A home equity loan may carry a lower rate, but it uses your house as collateral.Don’t make the mistake of thinking your creditors can’t force the sale of your house! What’s mor...