If you are going through a major financial crisis as you are getting drowned in your ever-spiraling debts, you may have considered a debt resolution program. But you need to understand what the process entails. You must not choose debt consolidation without having a sound knowledge about the entire process, its pros and cons, and the various myths and misconceptions surrounding it. Debt consolidation is supposed to be the most effective debt relief and management strategy for people who are distressed with overwhelming debt.
What Is ‘Debt Consolidation’?
According to https://www.investopedia.com, debt consolidation implies taking out a brand new loan for paying off multiple consumer debts and liabilities, usually, unsecured ones. In reality, several debts are integrated together into one single big debt, generally, with better payoff terms, lower monthly repayments, lower interest rates or even both. Consumers have the option of using debt consolidation as an effective tool for dealing with credit card debt, student loan debt, and other kinds of debt. This is a comprehensive definition of debt consolidation. However, you need to understand the myths and misconceptions of debt consolidation to understand the process properly. Here are some misconceptions and truths about debt consolidation.
Misconception: Debt Consolidation Bankruptcy, Debt Settlement, And Debt Management Are Same
The truth is debt consolidation is not similar to the other debt relief programs. In reality, it is more of a strategy than the program. In debt consolidation, multiple debts are combined together and a bigger loan is taken out to pay off the existing multiple debts. Debt settlement involves dealing with a professional debt settlement company or counselor for negotiating with your creditors to accept a reduced amount that you would be able to pay a lump sum to settle your debts. Bankruptcy is supposed to be an important legal proceeding that involves arranging a date with an esteemed judge.
As per https://www.nolo.com, bankruptcy provides an effective solution by giving an opportunity to people burdened with massive debt for getting out from the distressing situation while treating creditors in essentially a fair way.
Misconception: Debt Consolidation Is Only For Those Who Are Completely Useless In Money Management
The truth is the consolidation of debts has always been projected by people in the industry as a technique by which common people who are drowning in debt can recover and escape their debt traps. Sure, it is a really good method for people who find money management tedious and also like to reduce their outgo on the interest. What is not so well known is that consolidation of debts is a very popular financial strategy commonly used by the super-wealthy people and companies to organize and restructure their debts all the time to make their money work harder and bring better returns.
Misconception: By Consolidating Debt You Actually End Up With More Debt
The truth is debt consolidation is not a process that can reduce or increase your debt. It is just a new loan that you take to repay your old loans that are carrying higher rates of interest. After the debt consolidation exercise, you still have the same overall amount of debt but you have reduced the number of loans to just one. Not only do you benefit by not having to track multiple debts for making the monthly payments but also you are able to switch to a lower rate of interest that can result in significant savings. The reason why the myth is perpetuated is that after consolidating their debts, most people are unable to curb their habit of swiping their credit cards freely and end up piling up fresh debt. Go through debt settlement ratings to make the right choice.
Misconception: You Need To Be A Homeowner To Benefit From Debt Consolidation
The truth is, technically speaking anyone wanting a single debt to replace multiple debts to make money management easier can go in for debt consolidation. The extent you are able to benefit from the reduction in the rate of interest depends on your credit score in case of unsecured debts. If you have substantial equity in your home, you can opt to take a home equity loan that carries a significantly lesser rate of interest as the loan is secured with the collateral of your property. While you get the maximum savings in the interest, you also end up putting your home at risk if you default on the loan payment due to an unexpected event.
Misconception: Debt Consolidation Would Be Hurting My Credit Score
The truth is if done well, debt consolidation would not be impacting your credit report or credit score adversely. In reality, debt consolidation may boost your credit score. That is primarily because debt consolidation involves taking out a bigger loan for paying off all your existing multiple loans, debt consolidation may end up improving your credit score.
Misconception: Debt Consolidation Necessitates A Lawyer Or An Outside Agency
The truth is that there are several counselors and companies that are willing to offer professional services to help you effectively consolidate your debts. You may even opt for debt consolidation on your own. However, for DIY projects, it is pertinent on your part to know about the options available and how to go about it. Debt consolidation could certainly be a DIY project for all those individuals who are really good with money. Debt consolidation does not have to be visible to the outsiders. Your credit bureau, your bank, and all other parties may never know that you have opted for debt consolidation.
Conclusion: Debt Consolidation Actually Slashes Off A Portion Of Your Outstanding Debt
Debt consolidation does not reduce your debt. If you are $50k in debt, after consolidation you will still owe the full $50k to your creditors. Consolidation does not involve settlement, re-negotiations or any kind of write-offs on your debt. It is merely a reorganization that allows paying a lower rate of interest on what you owe in a single payment each month as opposed to multiple high-interest payments. This means you can get off debt sooner. You don’t save on the principal that you owe, but definitely, do on the interest.
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