Are you wondering whether to go for debt consolidation or not? Maybe you have heard some rumors about it and need some new perspective.
Debt consolidation is nothing but merging all your debt into one loan with a lowered interest rate and extended repay period. It might seem easy and straightforward but it’s not. There are many terms and conditions that are involved which make applying for a debt consolidation a headache.
Here are the 5 myths about debt consolidation loans.
1. It is bad for your credit score
Consolidating your debts will not hurt your credit score. Although, you might see a decline in your credit score immediately after you apply for a debt consolidation loan. This also happens when you buy a new credit card.
To sum up, a debt consolidation program is designed to combine all your debts into a single manageable loan with low interest and more time to pay off the debt. Doing this will only make your credit score rise as you are getting rid of your debt faster than ever.
2. Debt consolidation is the only way to get out of debt
Some of you might have heard of debt consolidation as a go-to solution to clear the debt. But this is furthest from the truth. Some other options are equally efficient.
A debt management plan is one such option that you can choose without having to take a new loan. A debt management company negotiates with your creditors to lower your interest rates and extend the time to repay. This plan is great for people with a low monthly income.
3. Interest rate is higher than other types of loans
Some people indeed have to pay a higher interest rate after consolidating their debts but this is not a thumb rule. The interest rate is calculated keeping many factors in mind. One such factor is your credit score. So, with a good credit score, you are almost guaranteed to get a lowered interest rate.
4. You need a good credit score to get your debt consolidation loan approved
As already stated above, your credit score is a factor that comes in while calculating the interest rate on the consolidation loan. But this does not mean your application for a debt consolidation loan will get rejected if you have a low credit score. You will have to pay a higher interest rate and the repayment terms may not be as favorable. A score lower than 579 is considered as poor. So, having a fair/good credit is an advantage but not a dealbreaker.
5. Debt consolidation reduces your debt
Consolidating your debts will not reduce your total debt. It will only combine all your debts into a single more manageable loan that will have a new interest rate. It’s possible that people confuse Debt consolidation with another debt repayment strategy known as Debt Settlement. Debt settlement does include the lowering of your total debt.
It’s possible that some of the above-mentioned points may not stand true in certain situations. Every debt loan has its pros and cons. You need to look for things like the origination fee, late fee, prepayment fee, annual charge, APR, etc before choosing a debt consolidation plan.