What is Debt Consolidation?

If you have multiple sources of debt, including credit card debt, outstanding medical expenses, or personal loans, debt consolidation may be a debt management strategy worth looking into. Debt consolidation allows you to pay off multiple existing loans with one new loan. This leaves you with one interest rate and only one monthly payment to concern yourself with. The new loan may (or may not) have better interest rates than some of your individual loans, which in turn will save you money by considering debt consolidation.

Debt consolidation works by combining all of your outstanding debts into one loan. Depending on the terms of the new loan, it could help you get a lower monthly payment, pay off your debts quicker, increase your credit score, and simplify your financial affairs. The process includes taking out a new loan, using the new loan to pay off your old debts, and then paying off the new loan.

What Are Some of the Benefits of Debt Consolidation?

There are several benefits to consider when deciding whether to try debt consolidation.

While taking out a debt consolidation loan may initially hurt your credit, it is likely to improve your credit score in the long run. However, this only applies so long as you are not taking on additional debt.

By combining all your debts into one monthly payment, you simplify your monthly obligations. Additionally, having multiple monthly payments can lead to mistakes, like being late on multiple loans. When you only have one loan to worry about, you can focus more easily on your finances and keeping things in order.

Another big advantage of debt consolidation is that it may enable you to get out of debt faster. By consolidating high-interest debt into a low-interest loan, more of your money goes towards the loan principal monthly rather than interest rates.

What Are Some of the Drawbacks of Debt Consolidation in California?

While debt consolidation has many pros, the strategy is not without its cons. Today, we’ll discuss some of the pitfalls and common mistakes that people make when consolidating debt.

There Are No Guarantees

Consolidating debt does not guarantee that you will get out of debt. Before considering debt consolidation, make sure that your spending habits are under control, that you’re on top of your monthly payments, and that you have a decent credit score.

Strict Eligibility Criteria

Debt consolidation loans are considered unsecured personal loans. These types of loans usually require good to excellent credit scores for approval with competitive rates. If you do not have a good credit score, consider asking a cosigner or a co-borrower with a strong credit history to help you with your application.

There May Be Upfront Costs

Many consolidation loans feature an origination fee to cover loan processing costs. While these fees are usually low, some can be high, costing debtors several hundred dollars extra.

It’s Not an Instant Fix for Financial Woes

Consolidating debt will not solve your financial problems on its own. Nor will consolidating debt ensure that you will not go back into debt again or that your financial habits will improve. If you live beyond your means, you might do so again right after you get out of debt. You need to approach your debt issues with a wider scope.

Debt Consolidation Loans May Potentially Come with High-Interest Rates

While debt consolidation will simplify your financial affairs and monthly payments, you could actually end up paying higher interest rates. This could occur for several reasons, including a bad credit score.

You Shouldn’t Miss Payments

If you miss monthly payments, you will be set back even further than before. Make sure that you can afford the monthly payment plan before you take out a debt consolidation loan.

What Are Common Mistakes to Avoid When Considering Debt Consolidation?

Californians in deep debt are understandably looking for surefire solutions to their financial woes. And while debt consolidation is a useful strategy for getting out of debt, there are plentiful opportunities to make mistakes and make matters worse.

Not Comprehending How You Got into Debt in the First Place

Even if you’re able to get out of debt, failing to understand how you got into debt in the first place could result in you making the same mistakes again. If you don’t carefully consider and examine how you ended up in debt, you might never change the spending habits that resulted in this unfortunate situation.

Failure to Consider All Your Consolidation Options

There is no one-size-fits-all approach to paying off your debts. Before you take out a debt consolidation loan, consult with experienced attorneys to learn your legal options for contending with your debts.

Don’t Always Take the Plan with the Lowest Monthly Payments

While picking a loan repayment plan with the lowest monthly payments may appear to make sense on the surface, typically, these plans require that you keep paying over a longer period of time. It may be worth paying more on a monthly basis just for the opportunity to get out of debt that much faster.

Always Check for Fees

There are two primary fees to be on the lookout for when you apply for debt consolidation loans. Origination fees are upfront charges that lenders may apply to your loan. If possible, attempt to avoid origination fees by shopping around for lenders that do not charge them. You should also be careful about prepayment penalties.

Not Changing How You Use Credit

If you do not consolidate debt correctly, things could get worse instead of better. If you are really trying to change your spending habits, consider limiting your access to credit cards and spending temptations.

Skipping Legal Counsel

It is highly encouraged to retain professional legal representation from experienced lawyers when looking for ways to get out of debt. Our law firm would be proud to lend legal assistance and answer any of your questions about different debt management strategies.

Contact Us for an In-Depth Case Evaluation

If you have any questions or concerns about debt consolidation and other debt relief strategies, don’t hesitate to get in touch with our California law firm to schedule your initial consultation today. Our law firm has extensive experience representing clients swamped by debt, and we would be proud to lend our legal assistance to you during this difficult time.

You may reach us at 714-701-6356.