If you are having a hard time paying two or more debts, there’s a good chance that you’ve encountered debt consolidation, which is one of the most recommended solutions for people like you. But because you’re not familiar with it, you’re a bit wary of getting into it.
It’s normal to have these feelings. It’s good to be skeptical as this is what will push you to do extensive research about something that you are not that knowledgeable about.
Here are some basic facts about debt consolidation, to be followed by the biggest misconceptions that should not affect your decision.
What is Debt Consolidation?
Debt consolidation is a process in which you combine several loans into one loan so you will only have to make a single monthly payment and ideally, enjoy a lower interest rate. Many people find this convenient as it enables them to handle payments more easily. The problem is, there are many myths spread by those who are against debt consolidation. You need to know about all these so you can make informed choices.
Misconceptions Surrounding Debt Consolidation
Myth # 1 – Debt consolidation is a scam
Some people stay away from debt consolidation because they are made to believe that it is a scam. While it’s true that there are some scammers posing as legitimate debt consolidation companies, it’s also true that there are many reputable and authentic debt consolidation companies that work for your interest.
If you’re going for this route, make sure that the company you are eyeing for is a register nonprofit 501 (c)(3) organization. Do not trust any company that asks for an upfront payment, or provides you with an offer that seems too good to be true. Do an extensive background check on the company before working with it.
Myth # 2 – Debt consolidation is the same thing as debt management plan
This is another area that many people make a mistake on. Many people think that debt consolidation and debt management plan are exactly the same thing. Fact is, even though they are quite similar, there are many important differences that you should know.
In debt consolidation, you are the one to apply for a loan that you will use to pay off the debts that you have. This leaves you one monthly payment to make. In a debt management plan, you don’t have to take on a loan. But you will enroll with a program with a credit counseling agency, where you will make a single payment each month, and the agency will be the one to pay off your debtors. The agency will be the one to negotiate to reach agreements with the companies you owe money from.
Myth # 3 – Debt consolidation is always the best solution
Debt consolidation companies would like you to think that this is the best solution for resolving debts. In some cases, yes, it is. But this does not apply to all situations. It is imperative that you study about your situation carefully and consult with a trustworthy financial adviser. You also need to seek other options for resolving your debts, as there are many that may actually be better than debt consolidation.
Myth # 4 – Debt consolidation will help you save money
It’s important to know that there are many types of debt consolidation loans. Some of these may indeed help you save money, but not all will do the same thing for you. Your choices include: debt consolidation loan from a bank or credit union, home equity loan, and unsecured personal loan. You need to take the time to research each of the options that you have, taking into account all the costs involved to make sure that you don’t end up paying more than what you originally owed.
Myth # 5 – Debt consolidation will negatively affect your credit rating
There are two major factors that affect your credit score. One is your payment history. And another is how you utilize your credit. At first, your credit score may be lower as you will be opening new credit with your debt consolidation loan. But if you make sure that you pay your monthly due on time, it will recover immediately. It’s also a smart move not to take out another loan or open a new credit while you’re in debt consolidation so as not to hurt your credit rating.
Know the myths and facts about debt consolidation so you can determine if this is the most viable route for you.