Debt consolidation is a better alternative to the high-interest liabilities that cripple your finances each month. You need to pay only one loan instalment instead of many, that too much lower than the other combined. However, many people find themselves once again under a pile of debt because of their financial decisions.
Apart from the unnecessary expenses, we make decisions without any long-term goal or planning. This led to ineffective management of finances, and another series of debts and repayment. Instead of being helpful, debt consolidation loans can hurt your finances and here are the 6 reasons why.
Not Finding the Reason for the Debt Overload
Extravagant lifestyle, unnecessary expenses, or some emergency are the significant reasons why people get stuck under enormous debts. Find what the reason in your case was. If not, you will find yourself once again in the same situation after a few months or years.
It may require a comprehensive review of the expenses, credit card statements, and other receipts. Track your spending habit to monitor which expenses are breaking your budget. It will be easier for you to plan if you know the spending habits that need to change.
This process is fundamental not to repeat the same behaviour. The debts will stack over time, and it will be a matter of time when they get out of control. Cut your spending and try to increase to income to ensure there is no new debt.
Settling for Debt Consolidation Loan without Research
There are plenty of lenders that offer debt consolidation online loans in Ireland. You may choose the first in the search results to save time and efforts. But a wrong decision might cost you hundreds or thousands of pounds.
It is recommended to do proper research about loan offers made by lenders. The overall cost need not be less because the interest rate is low. Here, the APR can make all the difference between the cost-efficiency of the two loans.
You need to go carefully go through the loan documents. Take help from your family or friends if you don’t have any financial advisor to read between the lines. Many lenders also offer repayment holidays to avoid default in financial crisis. Ask their representative about it.
Inefficient Money Management
Again, the unnecessary expenses are a major reason why you took the loan. People do not take money management seriously and often break their bank with binge shopping every other month. They repeat the same pattern once their credit card bills are paid with a debt consolidation loan.
You need to start with a budget every month. Limit the use of credit card or try to avoid them altogether. Switch to cash and debit cards whenever you go out shopping.
For credit cards, you can close them if you think you cannot control yourself from using them. However, closing credit cards hurt your credit ratings. Even if it comes to closing one, choose the one with the shortest credit history.
No Repayment Plan
Debt consolidation was part of the plan to get relief from heavy interest liabilities. But you are still tied to a loan with the same principal amount. You must have a repayment plan to complete the loan if the lender approves bad credit loan with an instant decision in Ireland.
If you decide to pay small instalments, the loan can take a long time for repayment. Also, there might be financial trouble during the repayment period to increase the debts. You need to utilise every small opportunity for savings to repay the loan.
Long term loans are not suitable for your finances since it increases the overall cost of the loan. You will be paying lower instalment each month, but you are paying more interest. Chances of defaults because of the financial crisis also increase with the length of repayment.
Compare the repayment terms before you select a lender. Based on these terms, you can find the shortest possible term for repayment. You might have to select the longer tenure because of the limited earning.
No Emergency Funds
With the debt consolidation loan, you may focus on the repayment more than anything else. This prevents you from saving money for an emergency or financial instability. Therefore, it is essential to allocate money from the budget for a savings account.
The financial experts recommend 3 to 6 months of pay or living expense for the savings account. It might sound overwhelming to some, but it is achievable with small contributions.
To sum up, you need to plan after taking a debt consolidation loan to solidify your finances. Tough questions about the lifestyle need to be answered to prevent another debt overload. In the end, you will be free from any debt as long as you maintain the good habits of spending.