Debunking the Most Common Debt Consolidation Myths That Exist Today

debt

Did you know that more than 191 million Americans have credit card debt? Debt itself is not a bad thing and allows people to buy homes and cars they would usually not be able to afford. But do you know what to do when it gets out of hand?

One method is to place all debts into one payment, though this has an unjustified bad reputation. Read on as we debunk the myths around debt consolidation.

1. It Reduces Debt

The first myth is that debt consolidation actually reduces your debt. This would not make financial sense, as a company would have no benefit in paying off all of your loans for you. However, this does not mean it should be cast aside as an idea.

What debt consolidation does do is put all your debt into one place. This means you only have one monthly payment to make. If you have been juggling multiple debts over a long period of time, this can reduce the financial strain and make organizing your finances easier.

Consolidation often gets confused with debt settlement. This is when you hire a company that contacts your creditors and asks them to reduce the amount you owe. However, this method can cost a lot and damage your fragile credit history.

In summary, debt consolidation won’t wipe away your debts. You still pay them back over time, but the method in which you do so becomes much easier to manage. This lets you get on with your life and rearrange your finances.

2. It Damages Your Credit Score

Having a good credit score is always important. Not only does it allow you access to more lines of credit, but it also gives you more favorable rates. However, if you have reached the point of needing debt consolidation then you probably already know that.

When debt needs consolidating, your financial health will have already taken a hit. The initial credit checks for debt consolidation may take a few points from your credit score. But by this point, it may not matter that much.

In addition, consolidating debts gives you financial security over time. As long as you don’t open other lines of credit and stick to the consolidation repayments, your credit score can actually improve.

Debts on credit cards and personal loans can be reduced to zero, so all you are paying back is the major loan. By actively improving your credit score at this point, you could make a huge difference in the long term.

3. It Takes a Long Time

Debt consolidation loans do not take any longer than other loans to arrange. In fact, depending on the circumstances they can be done in as little as a few days.

One factor that might impact it is your credit score. If it is not good enough to qualify, then you may have to go away and improve your rating. This can add length to the process.

After this, you should take the time to research loan options and find the one that is right for you. Don’t rush into taking the first offer that comes along.

The rest of the time is made up by the lender giving approval and processing the loan. Once cleared, the money can be in the bank within three to four working days, in some instances on the same day.

4. It Is a Scam

Like any financial transaction, scammers will try to worm their way into transactions. This is especially true when people are at their most vulnerable and need emergency cash or loans. However, that does not mean debt consolidation has any more or less risk than other financial schemes.

All you need to do is thoroughly research the credit counsel that is providing your loan. Look for a company that started business before the recession of 2008, when many scammers arrived to take advantage. Any organization that is registered as a non-profit will have undergone adequate screening.

You should never be asked to pay money upfront. This is the previously mentioned debt settlement method. Stick with reputable offers such as this Plenti debt consolidation loan.

5. It Leads to More Debt

It is true that debt consolidation does not always fix the root of the problem. You may have problems curbing your spending or managing your finances. It is important that these problems are addressed when you take out the loan, or you will fall into the same habits.

However, with debt consolidated, making a change becomes much easier. You only have to worry about the single payment each month. This leaves you free to concentrate on avoiding opening up other lines of credit or improving your credit score.

Many debt management plans include debt counseling. However, the change must come from you. There are many resources to help online, from advice on creating household budgets to saving money.

6. Debt Consolidation Saves Money

There are three main types of debt consolidation loans. Your first option is to go for a straight-out consolidation loan from a bank or credit union. The second is to use an unsecured personal loan to consolidate debts yourself.

The third is to get a low-interest home equity loan. However, this does put your house in jeopardy so you must be confident that you will succeed in the consolidation practice.

To save money, you need to check the interest rates of the debt you owe against the rate you get for your loan. In a given time period, if you use the money to pay off your other debts, check to see if the debt consolidation loan works out cheaper.

However, for some people saving money is not the goal. If you can reduce your debt into one easy payment and manage it, it can be better in the long term.

Starting Out

In summary, make sure you know the type of loan you are going for. Put a plan together to pay it back and improve your spending habits. With work, debt consolidation can get you back on track.

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The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.