Debt consolidation involves taking out a loan to pay off outstanding debts. Although debt consolidation lends itself as one of the most effective ways to catch up to our debt repayment obligations, it is a poorly understood strategy and this prevents people from enjoying its benefits. In this article, we will explore some common misconceptions that make people either nonchalantly trusting or unnecessarily wary about taking on debt consolidation.
1. Consolidation and Bankruptcy are One and the Same Thing
While both debt consolidation and bankruptcy are aimed at helping to manage the consequences of your debt, that is as far as the similarities go. While bankruptcy essentially removes the liability for outstanding debt, consolidation merely allows the debtor to pay all his debts through a single channel. Bankruptcy comes much further down the road of financial mire, when the individual is completely unable to service their outstanding debt. Unlike bankruptcy, debt consolidation is not a preserve for people with bad credit. Although people generally consider it when their finances start spiraling for the worse, you can consolidate your debts at any time as long as it makes financial sense.
2. Debt Consolidation Harms your Credit Score
As is the case with all mainstream credit facilities, the credit bureau will be notified when you take up a debt consolidation plan. Initially, this might shave a few points off your credit score but as long as you keep up with your new payments to the new lender, it will recover quickly and rise. With a single monthly payment rather than multiple payments, your chances of missing a payment are considerably lower, and this further safeguards your credit rating. It is important to remember that the credit score is based on your repayment history as well as your utilization rate. If you continue to accrue more untenable debt after initiating the consolidation plan, your score will be negatively affected.
3. Consolidation always saves you money
Many consolidation companies promote the idea that consolidating your loans reduces the amount you have to pay back but that is not quite true. In reality, what debt consolidation does for you is to make your debt more manageable in a number of ways. Instead of having to deal with multiple collection agencies, you remit your installments to one financier. debt consolidation is that you can stretch out the repayment period of your outstanding debt, thereby easing the monthly payments that go into repaying various debt facilities. An important caveat is that the payments might still aggregate to a higher sum given the longer repayment period. Your original principal, interest and penalties will most likely still have to be paid to the original creditors, in addition to the interest rates for the loan advanced by the consolidator. It is important to remember that debt consolidation is not a magical solution to your debts. Rather, the only thing that changes is who comes to collect.
4. Consolidation Guarantees You Debt-Free Finances
Debt consolidation does not amount to debt forgiveness. You should think of it as a way to make your debt more manageable and easier to account. In the end, your repayments will still have to cover the outstanding debt. Essentially, debt consolidation gives you a fresh start by instantly wiping your existing debt slate clean. An important part of making the best of debt consolidation is putting a lid on your unsustainable spending habits. If you continue to use your credit card and other borrowing facilities for all your expenditure, your debt burden will continue to increase.
5. All Consolidation Offerings are the Same
Different loan consolidation companies approach the process in very different ways. The terms, interest rates, penalties and repayment periods among other details will vary depending on which company you choose and how your credit portfolio looks. There are lending companies that have specialized debt consolidation packages which make the whole process of getting a loan easier. Credit unions are a great option to consider. Essentially, credit unions are non-profit agencies that help people who are struggling with poor finances to get favorable deals on loans and other facilities. It is advisable to conduct extensive due diligence when considering a debt consolidation to ensure that you get the best possible deal.
Resources:
1. https://www.imoney.sg/articles/debt-consolidation-misconceptions/
2. https://www.nationaldebtrelief.com/7-deadly-myths-debt-consolidation/
3. http://www.usmoneyledger.com/your-money/top-eight-misconceptions-debt-consolidation-2067.html
4. https://www.debt.org/blog/debt-consolidation-myths-and-facts/
5. https://www.nerdwallet.com/blog/loans/debt-consolidation-myths/
