Are you someone who owes a lot of money to creditors? Do you sometimes get angry letters or calls from companies asking for the money you owe? Are you on the verge of declaring bankruptcy? Luckily, this can all be fixed with a debt consolidation loan.
The concept of a debt consolidation loan is pretty simple; you combine all your debts into one loan rather than looking after debt repayments to many different creditors. By paying towards consolidation loans, you can make your debt less of a burden, and make organizing your finances more feasible.
Before you decide whether or not a debt consolidation loan is the right option for you, here are some common misunderstandings about consolidation loans.
1. Debt Consolidation Loans are Cheaper Overall
People often think that combining a lot of different debts into one means that their overall debt is being reduced. This is not the case. The truth is that a debt consolidation loan will not lessen the money you owe. The amount you owe the creditors will always stay the same. Instead, the purpose of a consolidation loan is to help you with your debt management.
2. Debt Consolidation Saves Money on Interest Rate
This is one of the most common misunderstandings of how debt consolidation works. People think they will save a lot of money on interest rates by getting a consolidation loan. The logic is that if you go from paying many loans with different interest rates to one loan with just one interest rate, then you are saving on the overall interest rate. The way it really works is the lender will determine how much interest you pay based on your credit score. The higher your credit score is, the lower your interest rate will be. Therefore, a significantly lower interest rate is possible, but your credit score plays a big role in what the interest rate actually ends up being.
3. Debt Consolidation Loans Lead to More Debt
People sometimes think that a debt consolidation loan will hinder more than help and that you’ll only be delaying your debt by getting a consolidation loan. Because a consolidation loan won’t save you on interest, nor will it actually decrease your total debt, many end up wary that there is a catch and that this type of loan will only lead to more debt. However, when people are repaying loans, they tend to miss out on payments which leads to paying a late fee. Debt consolidation helps you break the late fee cycle by ensuring you pay monthly, thereby not increasing your total debt, but aiding the ease of payment.
4. You Cannot Consolidate Debt if you Have Bad Credit
This is the most misleading of all. In reality, debt consolidation loans come in most handy for those who do have bad credit loans. In fact, consolidation is beneficial for both the borrower and the lender. Had debt consolidation loans rejected applicants with bad credit, lenders would lose money on those who needed them the most.
5. Debt Consolidation Ruins Credit Score
While debt consolidation can have an impact on your credit score, its effects are not as severe as you may think. The outcome of your credit score will be insignificant in the long term. As long as you keep paying the debt consolidation bill on time, you will actually have a positive effect on your credit history.
6. Debt Consolidation Will Decrease Debt
Another prevalent myth about debt consolidation is that it will automatically decrease your debt. Whether it be student loans or credit card bills, your overall debt will remain the same no matter what. What a debt consolidation loan actually does is help you pay those loans off by providing you with a single interest rate and by making payments simple and easy.
7. Consolidating Debt is Time-Consuming
People often think that consolidating their debts is a lengthy and time-consuming process. However, the truth is that you can apply for consolidating loans from online lenders, which generally takes only a few days to get approved.
8. Debt Consolidation Loans Cost a Lot
People often second guess debt consolidation loans thinking that it will cost them a fortune. But the cost of the loan depends on the interest rate they get, which depends entirely on the lender. What people do not know is that debt consolidation costs less than credit cards because lenders often do not charge any extra fees.
9. Your Savings Will be Depleted
People usually believe that institutions such as credit unions and online lenders will exhaust their savings. Though loaners charge a membership fee or an initial fee, it is unlikely that it will put a dent in your savings.
10. You Can Get a Government Debt Consolidation
This is probably one of the contributing reasons why debt consolidations have a terrible reputation. The fact is government debt consolidations do not exist at all. There are debt relief orders, but politicians have yet to back debt consolidation loans on the governmental level.
11. You Should Only Get a Debt Consolidation Loan if You Have a Poor Credit Score
Indeed, those who are struggling with paying off their creditors and are in a bad financial state can benefit the most from debt consolidation loans. However, people with a good credit score are also eligible if they are looking to better coordinate their debt payments.
12. Debt Consolidation Loans Need a Co-signer
Although a co-signer might be necessary when applying for a debt consolidation loan, this is only true for those with a very low credit score. Although finding a co-signer can be a bit of a hassle, it can also be an added advantage for you as a borrower.
13. To Get a Consolidation Loan, You Need to Have a Lot of Debt
Again, not valid. There is no limit on how much or how little money you have to pay off. If your debt is small-scale, you are at liberty to choose a shorter period to pay that loan. You don’t need to be very deep in debt to qualify for debt consolidation.
14. You Can Get a Loan Without a Credit Check
This is technically true, however, you should be highly cautious of lenders who are willing to consolidate your loans without checking your credit score. Lack of a credit check when it comes to debt consolidation is a sign of a dishonest loaner.