Debt consolidation is a popular debt relief tool when you are suffocated with multiple debts that are getting uncontrollable for you. However, the current debt relief market is flooded with several myths surrounding debt consolidation, which should be debunked – so that you can come up with an informed decision on how to manage your debts. The post below explores the common debt consolidation myths and reveals the actual truth.
Myth 1
Consolidation is same as debt management, settlement and bankruptcy
Truth
Debt consolidation is very different from debt management or settlement and bankruptcy. When you go for debt consolidation, you take a new loan to pay for the existing debts. The new loan comes with a lower interest rate than the existing loans and assures one single payment for you per month.
On the other hand, debt management or settlement involves a reduction of your existing debt through negotiation with your creditors or lenders. No new loan is taken here. Bankruptcy refers to a sort of legal proceeding where you have to meet the judge.
Myth 2
Consolidation hurts credit score
Truth
If you are proper with your debt consolidation, it won’t affect the credit report or score negatively. Moreover, debt consolidation might even improve the credit score. It’s because consolidation comes with lower interest rates that will help you to repay the new loan more effectively. If you are disciplined with the monthly payments and pay off the loan in time, you will be rewarded with an improved score.
Myth 3
Debt consolidation will reduce the debt
Truth
No, a consolidation loan won’t reduce the debt, it’s the debt settlement or debt management program that does that. In debt consolidation, you will take a new loan equivalent to the total amount of your existing debts so that you can pay off the current debts completely. The most important advantage of debt consolidation is that your new loan will come with a lower interest rate, which makes the situation more manageable and affordable for you.
Myth 4
Debt consolidation loans are available to homeowners only
Truth
Though homeowners who are willing to place their home as a collateral do have the advantage of securing highly slashed interest rates with consolidation loans, yet, that does not necessarily mean that the debt consolidation program is only applicable to homeowners. You can still get approved for a consolidation loan if you don’t own a house.
Myth 5
Consolidation loan puts you into a further debt trap
Truth
It’s true that debt consolidation program involves taking up a new loan, but the “trap” word does not suit here. On the other hand, it can be said that debt consolidation loan makes your debt situation even more manageable with a lower rate of interest compared to the interest rates of your current debts. For example, suppose your current debts amount to 10,000 USD with 22% interest. Now, if you go for a consolidation program, you will borrow the same amount (10,000 USD) but the interest rate would be lower, something like 12%. Thus, with the new loan, you would be in a much better position to pay off in time and would soon get debt free.
