- Debt consolidation requires you to repay 100% of the amount owed.
- You could save money if you can reduce the interest rate and/or shorten the loan term.
- It is often possible to get a debt consolidation loan even with less than perfect credit.
Are you exhausted from making minimum payments on credit card debt, month after month, watching the balance barely move? Are you looking for a way to pay off high-interest accounts without ruining your credit?
Debt consolidation is a popular way to deal with credit cards and other unsecured bills. However, false information is abundant, creating myths that could cost you money if you don’t take the time to separate fact from fiction.
Below are five common myths associated with debt consolidation loans that might influence your decision.
Myth #1: Debt Consolidation and Debt Management Plans Are the Same Things
Fact:Debt consolidation and debt management plans reduce the number of monthly payments, could save you money, and require you to repay 100% of the amount owed. But that is where the similarities end.
Under a debt management plan, a credit counseling agency serves as your advocate. You enroll unsecured debts like credit cards,and the company manages creditor communications and repayment. Under the new plan, you make one monthly payment to the credit counseling agency, and they pay each creditor. You must repay the balance owed within five years. In many cases, lenders reduce interest rates and waive late fees, saving you money.
Under debt consolidation, you roll multiple bills into a new loan and repay it based on the new loan terms. Repayment periods generally last between one and seven years, and you can save money through the shorter repayment and, in some cases, a lower interest rate.
Myth #2: Debt Consolidation Permits You to Pay Less Than You Owe
Fact: Debt consolidation requires you to repay 100% of the balance owed. However, you can save money through a lower interest rate or a reduced loan term. Consolidation loans typically charge simple interest instead of interest that compounds daily, which can also reduce costs.
Myth #3: Debt Consolidation Loans Always Save You Money
Fact: Debt consolidation loans do not always shrink your monthly payment or reduce costs because lenders offer loan terms based on your credit. You may qualify even with fair or poor credit, but you may not get terms that lower costs.
Loans with collateral tend to have better interest rates, but the downside is the risk of losing your property if you cannot make on-time payments. Applicants with excellent credit may also qualify for lower interest rates through an unsecured consolidation loan.
Myth #4: You Can Only Qualify for Debt Consolidation If You Have Excellent Credit
Fact: Lenders approve applications based on credit, income, assets, and the presence of collateral. Having excellent credit and offering collateral are ways to improve the loan terms. Despite this, many lenders provide debt consolidation loans to applicants with less than perfect credit.
If you have marginal or poor credit,you may get approved but pay a higher interest rate and, in many cases, have a shorter loan term. The new loan may increase your monthly payment. However, you still have one amount to pay each month and a set payoff date, which could help get rid of high-interest debts and save you money over the long term.
Myth #5: Debt Consolidation Damages Your Credit Score
Fact: Debt consolidation is the only debt relief option that does not automatically damage your credit score. A consolidation does reduce your overall balance. It only transfers obligations to a new loan. Your score will improve as you repay the loan provided you make on-time payments.
Debt consolidation loans can allow you to repay high-interest debt without some of the unpleasant consequences of most relief programs. However, the loan terms will directly reflect your credit, income, and other financial factors measured by the lender.
If you cannot secure a loan with acceptable terms, debt settlement may be a better approach. Negotiating debts with creditors do not require you to qualify for a new loan. It might allow you to change the existing loan terms and make it possible to eliminate the debt without paying the total amount due.
If you would like to learn more about how debt settlement can help you get out of debt faster and for less money, contact us today.
Will debt consolidation ruin my credit?
In most cases, debt consolidation has a neutral effect on your credit because you transfer balances to a new loan. If you do not add new debt to recently paid-off accounts, you can expect your credit to improve as you repay the loan.
Does debt consolidation take longer than other debt relief plans?
Most debt relief programs require payments for three to seven years. Debt consolidation loans generally last between one and seven yearsfor unsecured loans. Using home equity to consolidate debt can push payments out to 30 years.
How will I save money through a debt consolidation loan?
Debt consolidation loans could save you money if you can qualify for a lower interest rate. You could also reduce interest payments by shortening the loan term.