A debt consolidation loan is a very bad option for any borrower who expects to have problems consistently making the payments. Additionally, if you have a secured debt consolidation loan such as a home equity line of credit, you can end up putting critical assets at risk.
Before you decide to take out a debt consolidation loan, you should talk to a trusted financial advisor. A trustworthy expert can analyze your debt situation and help you make the best decisions about how to deal with all your outstanding debts. A financial advisor can determine the best options for you to manage your debts without destroying your credit rating in the process.
Be Patient, and Always Consider Alternatives
A debt consolidation loan will definitely have an effect on your credit; all borrowers must determine whether that effect will be good or bad. If your debt consolidation loan helps you to manage your finances more effectively, maintain a budget, and make timely debt payments, it’s likely that your credit will improve over time. However, if debt consolidation only serves to worsen an already challenging financial situation, chances are strong that your credit rating will take a turn for the worse.
Prior to settling on debt consolidation, or choosing a particular type of loan, you should analyze your current situation and choose debt management options that’ll work best for you. This is an ideal time to bring in that trusted financial advisor. A good advisor will help you figure out how to address your debt and protect your credit at the same time.
Once you settle on a debt consolidation loan, make sure you tie it into a broader strategy to eliminate your debts and improve your financial situation. The loan should be linked to your budget and your spending plans, so you can make better financial decisions every day. Finally, even after consolidating your debts and beginning to repay them, don’t expect changes to your credit overnight. It takes a long time to pay down high levels of debt, and it may be months or even years before your debt reduction strategy begins to improve your credit rating significantly. Be patient and take a long view when it comes to improving your credit and paying off your debts.
If you’re concerned about the effects that applying for a debt consolidation loan may have on your credit, you can consider non-traditional lenders, too. Most peer-to-peer (P2P) platforms, which link prospective borrowers with private investors who are willing to lend them funds, don’t execute hard credit inquiries prior to issuing debt consolidation loans.
While these unique debt consolidation options provide some indirect benefits, there are also unique risks associated with both of them. Borrowers who fall behind on a HELOC put their homes at risk, as lenders can potentially seize any property that was used to secure the loan if the borrower is delinquent on the payments. Additionally, borrowers who use a 401(k) loan may be subject to early withdrawal, tax, and other penalties, and may not accumulate enough value in their 401(k) to retire on time because of the loan. Borrowers should take all the benefits, along with the risks, into consideration prior to choosing one of these two debt consolidation options.
If you’re planning to make a major life purchase in the near future, you may want to choose debt consolidation options with shorter time horizons. A 0% ple, may be a good choice for borrowers who have the desire and capacity to pay off all their debts in a year or so. Borrowers concerned about limiting their available credit may want to consider other options instead of debt consolidation to address their outstanding debts.
Debt consolidation is just a tool to manage your outstanding debt more effectively; it cannot solve your financial problems. If you don’t address the underlying reasons why you ended up in debt in the first place, whether counterproductive spending habits, living beyond your means, or having no budget, you could end up in a worse situation than when you started, and with worse credit, too. All borrowers have to be prepared to change some financial habits when they decide to address all their outstanding debts.