When it comes to debt consolidation, you have a couple of misconceptions that are harmful to people. Once you get into debt, the effects can be drowning because you have to juggle so many different bills that you can lose your head easily. Let’s have a look at the most common types of debt consolidation […]
When it comes to debt consolidation, you have a couple of misconceptions that are harmful to people. Once you get into debt, the effects can be drowning because you have to juggle so many different bills that you can lose your head easily. Let’s have a look at the most common types of debt consolidation misconceptions and where they have sprung from.
Understanding Debt Consolidation
Before we dive into what debt consolidation is, let’s first have a look at what it is because that in itself can dispell some of the myths. When you have a number of different bills, you may struggle to keep them all under control. That’s where debt consolidation can come in handy because of how it takes all your bills and puts them under a single loan. This makes it easier to pay off the loan because you only have to deal with a single loan for your monthly payment, which makes it much easier to wrap your head around.
Misconception #1: Consolidation Eliminates
As we outline above, debt consolidation doesn’t eliminate your debt. However, it does put everything under a single loan. In this way, you don’t have to worry about different interest rates adding up on your debt because everything will be put under a single loan. Eliminating debt, however, it does not do that. If you wanted to reduce your debt, you could go with a plan known as debt settlement, but in some cases, this isn’t always your best scenario.
Misconception #2: You Save on the Interest
You can save on interest in some cases, but we have seen cases where an individual jumped into a debt consolidation loan, and they were worse off. When hopping into one of these loans, you have to do it with your eyes wide open. You can save money on debt consolidation, but you have to know the terms and conditions and interest that you will have to pay on the loan. Let’s say that you have a strong credit score. In those cases, you could most likely secure a loan with a more favorable interest rate.
Keep in mind, you will normally pay more in interest when you have a longer term. While the rate might cost you less, you can expect to pay a little more on it than if you went with a loan over the short term.
Misconception #3: You Hurt Your Credit Score
When it comes to this misconception, you do have a kernel of truth here. If you apply for loans quite regularly, you will hurt your credit score over time. You may shave a few points off when you go to apply, but it won’t hurt your score in most cases if you apply for just one or two. You simply have to stay aware of how many times you have applied for the loan. In addition, this rule doesn’t just apply to debt consolidation, it applies to any loan that you go to apply for. In fact, having a loan could even help your credit score afterward as long as you continue to make the payments on it.
Why do you lose points when you go to apply for a loan? This happens as a result of what’s known as “hard inquiry.” Lenders will look at your score and determine whether to approve or reject your application. Based on statistics, people who make more credit inquiries have a higher likelihood of declaring bankruptcy. That’s the reason behind why you lose credit points when you make too many inquiries. It’s not that you shouldn’t go out and apply for a debt consolidation loan if you need one. You simply have to stay alert to how many times you have made a hard inquiry is all.
Misconception #4: Debt Consolidation is Guaranteed to Eliminate Your Debt
Again, we have to look at this logically and what it is. Debt consolidation takes your debts and puts them all under a single loan. If you still fail to pay that loan, you won’t be any closer to getting out of debt. We have to understand what debt consolidation really does for you. When you have a debt, it may come with interest and fees. That piles up and starts to suffocate you when you have too many of them. Debt consolidation provides you with a method of lowering the interest rates and fees. If it doesn’t do that when you go to apply, you shouldn’t use that as a method of eliminating debt because you will be worse off for it. You can manage your payments easier with debt consolidation, but you shouldn’t forget the ultimate goal behind it and make sure that everything checks out first.
Misconception #5: Credit Counseling Counts as Debt Consolidation
Credit counseling does exactly what it sounds like they do. They counsel you on getting rid of your debt, but they will not do a debt consolidation loan unless requested. In some cases, credit counseling will come before you get a debt consolidation loan. Keep in mind, however, they usually won’t offer you anything to eliminate your debt. Instead, what they will do in those cases is to help advise you so that you can pay off your debts, and you don’t find yourself deeper in debt. What it comes down to is knowing how to successfully manage your cash and teaching you how to take control of your debts.
If debt has begun to have a negative impact on your finances, you may benefit from debt consolidation as a way of putting everything into a single and manageable payment. Consolidating your debt using a personal loan is one of the best ways that you can tackle this type of debt. Another one of the good things about debt consolidation is that instead of having to deal with multiple interest rates, you only have to deal with a single interest rate on a loan. That makes it easier for you to make your payments to get out of debt faster.