Financial planning is difficult, and it only gets more complicated when you have unmanageable or mounting debt. As you prepare to pay off your debt, you must think about every variable that can work in your favor or against you. Many people commit a few mistakes when Pay off debt.
Here are 6 common mistakes when paying off debt:
- Not having a sustainable debt repayment strategy.
- Considering unsecured loans over secured lending.
- Failing to settle, restructure, or refinance a large debt.
- Ignoring the possibility of consolidating multiple debts.
- Under-utilizing or not leveraging all financial resources.
- Losing track of credit history, score, and latest updates.
This list isn’t exhaustive because financial circumstances aren’t identical, nor are people or their approaches. Besides, the type and amount of debt and pertinent factors specific to a case will have an inevitable bearing. That said, these 6 mistakes are highly probable among most people.
1. Not Having a Sustainable Debt Repayment Strategy
There are two prerequisites for financial prudence related to paying a debt:
● You should have a debt repayment strategy.
● The strategy should be practically sustainable.
Paying a debt can’t be a random sequence of events following an impulsive or urgent decision that isn’t fully thought out. The most common reason for people falling into a debt trap is a lack of planning, which also leads to unwise choices.
A plan or strategy, by extension, is quintessential if you want to manage your debt and emerge from it without any adverse effects.
Once you decide to work on a plan, you must determine the type of strategy that will work for you. In other words, the plan or strategy must be sustainable. Let me use income and spending as the first set of factors to illustrate the sustainability issue.
Take the following hypothetical example:
You decide on a specific sum of money that you can spare every month to pay a debt. In all likelihood, you’ve reviewed your monthly budget to determine this repayment.
Now, you shouldn’t reduce spending to the extent that it is unviable in a few months.
It’s normal to think that you can work with an unfeasible spending budget in distress, but such an approach doesn’t pan out the way anyone expects in the short to medium term. Simultaneously, you can’t have the same spending habits or budget that got you in debt.
Therefore, the debt repayment strategy has to be viable based on your financial needs. Unfortunately, this strategy will be more complicated if you have multiple debts to repay.
If you have multiple debts, you may want to prioritize the debt you wish to pay off debt before the others. You may choose the smallest debt to repay first or the one that has the highest interest.
A third option is consolidating all these debts into a single liability
Read Article : Top 5 Debt Relief Solutions: Which One is Right for You?
2. Considering Unsecured Loans Over Secured Lending
In an ideal scenario, no one would apply for an unsecured loan and pay higher interest (APR). But many people with a low credit score don’t have many options. So you may think that an unsecured loan is your only way to pay off debt. That’s not necessarily the fact in many cases.
You can obtain secured lending if you can use an asset, which doesn’t have to be something as valuable as a house you own. There are title loans available for you to consider, which won’t have the exorbitant interest rates of unsecured lending.
Credit scores aren’t a criterion for title loans offered by lenders like the BHM Financial Group. You can explore various types of title loans at a secured lending rate without transferring the ownership or ongoing use of your asset.
Some assets you can capitalize on are:
● Car
● RV
● Boat
● Truck
● Trailer
3. Failing To Settle, Restructure, or Refinance a Large Debt
Paying a large debt isn’t the same as falling behind recurring liabilities, such as bills. Like I said earlier, a repayment strategy must be for a specific type and quantum of debt. So you must think of the different possibilities that make an enormous debt more manageable and payable.
There are 3 conventional ways to manage one large unmanageable debt: Settlement, Restructuring, Refinancing
Each option has its merits and demerits. Let me highlight the most important pros and cons.
● Debt settlement reduces your overall liability, but you must make an upfront repayment in a short period, and your credit score is likely to take a significant hit.
● Debt restructuring reduces your current liability, but the relief isn’t the same as settling, and your credit history is likely to have a considerably negative effect.
● Debt refinancing is a new loan for the same outstanding amount, but at a lower interest and better repayment terms, with a positive impact on your credit score.
4. Ignoring the Possibility of Consolidating Multiple Debts
Dealing with multiple debts is daunting, whether you have one or more creditors, loans, or bills.
Many people prioritize one debt over another, which may enable a debt or more to fall even further behind the due dates. It is not uncommon for such debts to pile up and become an overwhelming burden. One way to avert such a financial crisis is debt consolidation.
Here are a few advantages of consolidating your liabilities when paying multiple debts:
- You combine all your impending liabilities into one consolidated debt and repay it.
- You don’t deal with multiple creditors or companies with different terms and interests.
- All liabilities have one interest rate, usually lower than the average you are paying now.
- Consolidation may boost your credit score if you reduce your total debt utilization ratio.
5. Under-Utilizing or Not Leveraging All Financial Resources
If the going gets tough, like when you’re paying a debt, you should utilize or leverage all your resources to the maximum, especially the financial assets. Any asset worth capitalizing on is a financial resource, such as the title loans available for owners of cars, trucks, trailers, or other assets.
A common debt trap for many, credit cards can become a valuable financial resource if you have one with a balance transfer feature and a lower interest rate than your liabilities. You can use this asset to gradually reduce your interest liabilities and pay off your debts sooner.
6. Losing Track of Credit History, Score, and Latest Updates
Last but not least, you shouldn’t lose track of your credit history. The credit bureaus and various reporting agencies, including some creditors, are infamous for erroneous records. Check all the updates so that your credit history doesn’t have any inaccurate data, or your score will suffer.