3 Reasons Why Renters Should Avoid Debt Consolidation Loans
- Debt consolidation applications can affect your credit score
Are you renting your home because you’re saving up for a down payment to purchase a home in the near future? Will you need to finance a car purchase soon? Have you thought about going back to school and taking out student loans to make that happen?
Applying for a debt consolidation loan will cause a hard inquiry to appear on your credit, which takes two years to fall off your report. And these inquiries can ding your credit score — which is the last thing you want to do when looking for a potential loan.
Your credit score will help determine what interest rate a financial institution offers you, and a lower rate can mean saving thousands of dollars over the lifetime of something dependent on good credit like renting your dream apartment or securing a strong mortgage rate.
- Debt consolidation can be costly
While debt consolidation seems like a good fix for managing payments, it won’t help if you can’t afford to make payments at all. If you miss a payment on your consolidated loan, you’ll incur late fees and your interest rate may increase. The consequences of falling behind on a debt consolidation loan are the same as with any loan.
As a renter, your living situation may not be as stable as you think. Some landlords and rental agencies aren’t very forgiving if you miss a rent payment or if you pay late. You don’t want to struggle to afford rent because you can’t make payments on your consolidated loan.
- Consolidating debt isn’t a fix for poor financial habits
Identifying the underlying problem behind your spending issues before applying for a consolidation loan is an important first step. Consolidating your loans and credit card balances makes it easier to keep track of your payments — but will it actually help you get out of debt?
Consolidating won’t help if you continue to practice the poor financial habits that led to debt in the first place. This is especially true for renters, who typically enjoy more financial flexibility than homeowners, since they’re not financially responsible for anything that may go wrong with their residence.
Renters’ insurance also tends to be cheaper than homeowners’ insurance, and renters don’t need to worry about extra costs associated with homeownership such as property taxes or lawn maintenance.
This flexibility can lead to the incorrect assumption that if you rent, you don’t need an emergency fund or as strict a spending plan as you would if you owned.
But everyone can benefit from tracking their spending, having emergency savings, or keeping to a budget. Renters need to take their finances just as seriously as homeowners. Before turning to consolidation, make sure you can manage your money wisely and change bad habits (such as frequently eating out or overspending on clothing and entertainment) that lead to accruing debt.