Debt consolidation is one of the ways you can tackle your debt. Debt consolidation helps simplify your payments by rolling your multiple bills into one payment and it can often lower your interest rate and help you get out of debt faster. However, if you want debt consolidation to work then you need to know the debt consolidation truths and myths.
There are a lot of misconceptions about using a loan for debt consolidation. Knowing debt consolidation truths and myths can help you make the right decision for your financial situation.
Top Debt Consolidation Myths
There are a lot of beliefs about debt consolidation. Is debt consolidation expensive? Does debt consolidation impact on your credit score? Keep reading and get answers about these questions about debt consolidation myths.
Debt Consolidation Reduces Debt
One of the biggest debt consolidation myths is that it doesn’t actually reduce your debt. Your debt also isn’t forgiven and instead you are paying off your whole debt with a loan. If you want to eliminate or reduce your debt then you need to look into debt settlement, which usually involves hiring a debt settlement company to work with your creditors to reduce your debt. This may sound like a better option and a good choice but it usually destroys your credit and can be costly. This is why debt consolidation is often chosen instead of debt settlement, despite different debt consolidation truths and myths out there.
You Always Will Save on Interest
One of the reasons many people choose debt consolidation is because it lowers your interest rate but this isn’t always the case. If your credit is strong then you may get an interest rate on a loan that is actually lower than your rate on your current debt. Total interest costs can increase if you extend your repayment terms.
Use a debt consolidation loan to calculate this and see how different rates and loan repayment terms can impact your payments. It also helps to see an example.
When You Do Debt Consolidation Your Credit Score Will Suffer
Can debt consolidation impact on your credit score? The truth is that you will need a hard credit pull when you are getting a loan for debt consolidation. However, this will usually only drop your score by a few points and isn’t usually a big deal. Depending on how debt consolidation works for you, you may actually improve your credit score since you are better able to pay off your debts. Any short term hit to your credit can be worth it if it can allow you to stay on top of your debt repayment plan and actually be in a better financial situation.
Debt Consolidation Is Expensive
The interest rate on loans you use for debt consolidation can vary due to different factors, including your lender, but on average they are lower than the average interest rate on a credit card. Many loans don’t have any extra fees. However, some loans do have origination fees to cover loan processing or fees for late-payments so it’s important to do your research if you are looking to save money, be sure to shop around. Find a lender that won’t charge a fee for paying off your loan early. Check the APR, which includes the origination fees, to make it easier to compare costs when researching different lenders.
Debt Consolidation Is Time Consuming
Many lenders use an online loan application process that will allow you to go through the process quickly using a secure online portal. The entire process, from your application to the funding of money, may only take a few days to a week. Some people think that you have to go back and forth with a lender and have a lot of meetings but you don’t have to do that. Preparing documents, such as bank statements, before applying can make the process even faster. While this won’t change your rate, you can get your money quicker and pay off your debt to start saving.
Debt Consolidation Is a Scam
Debt consolidation is a credible way to pay off your debts but you do want to make sure you do your research when it comes to getting a loan. There are predatory lenders that have popped up and are taking advantage of people who find themselves in a lot of debt.
Top Debt Consolidation Truths
While there are plenty of myths to be aware of, there are also a number of debt consolidation truths you need to know.
You Are Working with a New Lender When You Consolidate
When you get a debt consolidation loan, this usually means you are working with a new lender instead of the lenders where you have current debt. This isn’t a bad or good thing but it means that you need to understand the terms of your new loan and make sure that you know any rules that are unique to the lender. This is why shopping for the right personal loan and debt consolidation is so important so you find one with the right interest rate for your credit and the right terms you can live with. Missing payments is going to make your financial situation worse so you need to make sure you can make the payments.
Debt Consolidation Loans Can Be Secured or Unsecured
Some debt consolidation loans can be secured with collateral that you have. This can be things such as a car, business, or home. Secured loans may have a lower interest rate and can be easier to qualify for. Secured loans also come with greater risk because if you default on the loan then the lender can take the collateral. Not having any collateral can make it harder to qualify for a loan if your credit isn’t good. It may make sense for you to put up some collateral as long as you are aware of the risk.
You Can Use Home Equity Loans and Personal Loans for Debt Consolidation
Personal loans come with a fixed interest rate so they are usually an attractive option. There are many places to shop for online debt consolidation loans. With this type of loan, you get to pay off your debt with the knowledge that payments stay the same. Home equity loans do require your home as collateral. However, the interest rate on the loan can be even lower because you have that collateral. There can be fees for different loans. A home equity loan may have fees for the lender to appraise the value of the home or closing costs for the loan. Personal loans can have an origination fee. Be sure you are learning about any fees first so you can evaluate the total costs and decide if it’s the right choice for you.
Balance Transfers Could Be an Option for Debt Consolidation
A credit card company may want to attract new members by offering good deals on balance transfers. This means you may be invited to transfer your balance from other cards with low or even zero interest. This could be a good choice for consolidating higher-interest credit cards. It’s important to note that a credit card still needs to be paid on time. At the end of the promotional balance transfer period, the interest will become higher, which increases the amount of interest you are going to pay each month. If you do choose this route then you need to pay off as much as possible under the promotional rate in order to take advantage of the offer.
Your Credit Will Influence Your Debt Consolidation Options
As with any type of loan, it’s important to note that a better credit score opens up more options for you. Better credit will give you a better option, along with better terms. If you are looking for debt consolidation assistance then chances are your credit may not be that great. But there are still options for debt consolidation with your bad credit. It will likely cost you more and you may only qualify for a secured loan. If these are your circumstances then you will need to figure out if it’s the best option for you. While you don’t need perfect credit, it does help.
Debt consolidation can be a good option if you have some trouble with debt but you need to know about debt consolidation truths and myths. Debt consolidation truths and myths have made the process more confusing over the years. Usually, most people with bad credit needing debt consolidation loans. There are a lot of debt consolidation questions but the process doesn’t have to be all that complicated. Once you go through the process, you need to avoid getting in the same situation and in more debt.
Jackie Strauss is a finance writer with a background in economics living in Los Angeles. She has a passion for helping readers learn more about personal finance, insurance, home loans and paying down debt. As a college student during the Great Recession, she has had to learn budgeting and money saving techniques to become a new homeowner.