Seeking debt consolidation is one of the best ways to reach your financial goals, pay off all your bills and lower the amount of the costs that you have to incur in one go.
In this process, all different debts are clubbed together in one debt, and a loan is applied for that particular amount to clear off the dues. It appears to be a considerable way for people who are looking for a way to get out of their debts.
People often use the consolidation strategy to pay the debts of their credit cards that they are holding. Several people who own multiple cards, and owe thousands or even tens of thousands of dollars to the card companies, conclude to take up a consolidation loan to manage their bills efficiently.
Whatever the reason may be, if you are considering a consolidation loan, you will hear a lot of myths floating around about it. “It is bad”, “it will not help you”, “your debt will increase further,” etc. It is you who will decide whether or not you should go for debt consolidation. To help our readers get a clear picture of what it is, we have listed a few myths that they may come across while researching.
Myth 1: Debt Management and Debt Consolidation Loan are Both Similar
Though both the options are more or less similar, there are some notable differences between the two. When you choose to consolidate all your debts, you are taking out a loan of a certain amount and you need to pay the rest amount on your own. The funds obtained are then used to clear the dues and you have only one monthly payment left to pay off, that is the interest of the debt. On the contrary, the concept of a debt management plan is different. In this, you are not required to apply for a loan.
A credit counseling agency is involved and similar to the former option, in this you will have to make only one monthly payment. A counselor from that agency will inspect the amount of monthly payment that you can afford, and the time it will take you to repay the amount. You will then send the agreed amount to the agency, and they will distribute that amount among different debts to ensure that they are paid as quickly as possible.
Myth 2: Debt Consolidation Isn’t Legitimate
This is the biggest myth that people believe. In reality, it is one of the genuine approaches to clearing your debts. However, you are required to carry out intense research on the agencies that provide such a facility. Unfortunately, after the recession in 2008, the debt consolidation industry was believed to be something that cannot help people in paying off their debts.
It is not true. However, you are required to search for a trustworthy and reputed company such as Credit9 that offers the best-rated consolidation services. Also, ensure to choose one that has been in the industry for a long time now.
Be cautious about the company you choose, since one that asks for a lump sum amount initially, and then quits from paying your creditors, is a red flag.
Myth 3: With Debt Consolidation You Will Have to Pay Back Lesser Than the Actual Amount
Don’t mistake debt consolidation with the settlement of the debt. If you consider debt settlement, you will negotiate and settle on an amount that is less than the original.
However, you should know that debt settlement takes time longer than you expect and it also hurts your credit score. You may also have to pay extra taxes and costs. Additionally, there is no guarantee that you will pay less than what you owe.
On the contrary, if you consider consolidation of your debts, you are simply opting for a bigger loan amount so that all your smaller debts get settled.
Myth 4: It Takes Longer to Get Debt Consolidation Approved
It is another big myth because of which people don’t consider debt consolidation in the first place. If your profile gets qualified for a loan, all your debts will get consolidated within only a few days. However, there are a few factors that can affect the timeline of getting a consolidation loan approved. Some of which include,
- Whether you first want to improve your credit score or want to get qualified for a loan amount.
- The time is taken to research the available loan options.
- The time taken by the funds to get transferred. It typically takes a few days after your application gets approved.
- The timeline in which the lender processes and then approves your loan application.
Myth 5: Instead of Getting Decreased, your Debt Gets Increased
Another common myth that refrains people from opting for a consolidation loan is that it will increase the amount of debt for them. Though, no denying the fact that the root problem doesn’t get solved with this option. Your debts may get wiped off for once, but at the same time, you need to keep a check on your spending habits. Otherwise, the debts may accumulate again and you will be at the point from where you started.
If you choose debt management plans, credit counseling is required that will help curb your spending habits. We recommend you use a tool to manage your budget and also incorporate some good habits like keeping emergency funds to get away from applying for a loan. To stay debt-free, you should consider enhancing your financial literacy.
When you have too many debts to pay off, consolidation of debt is an easy way out, since it helps you pay your outstanding bills. While researching debt consolidation, you will come across a lot of contradictions about it on the internet. Just like it is with choosing any other debt payment solutions, you need to consider whether it is the right solution for you or not. Some think that one of the excellent ways of dealing with creditors is consolidation of debts, and vice versa. However, no matter what you decide, the decision shouldn’t be based on any kind of misinformation.