The Truths and Myths about Debt Consolidation
A debt statistics survey says that nearly 80% of Americans have Debt. People share information at incredible speeds without knowing its authenticity and unknowingly spread false information to people around them, and the same is true for the concept of Debt Consolidation. This article focuses on how to differentiate between the facts and myths about debt consolidation.
If you’re dealing with a huge amount of high-interest debt that is crushing you financially, you’re not alone. Millions of Americans have credit card debt, personal debt, private student debt, and even high-interest auto loans and mortgages that are burdening a financial future.
There is a common solution to this, though, and that is debt consolidation.
What is Debt Consolidation?
Debt consolidation is a service offered by banks and lenders that aims to lower interest payments for the borrower. It’s simple: the debt consolidation company will lend you a sum of money as an installment loan. You, with the help of the company, use that cash to pay off your high-interest debt in one fell swoop.
Then, you pay down the installment loan according to the terms.
What are the benefits of consolidating debts?
The benefits of debt consolidation are clear. First, you will get lower payments and lower interest rates, possibly allowing yourself to get locked into a lower rate and avoiding a high adjustable rate.
This allows you to save a considerable amount of cash over time. Imagine paying half of your current debt payment right now, for a shorter time than you needed to! Check out our website to have a brief idea on fixing the credits and loans.
Second, it may help your credit directly if you are paying off something that is past due, or if you are underwater on some debt.
Consolidated debt will also be cleared in bankruptcy, as well. This is one reason you might want to consolidate high-interest student debt.
What are the risks in consolidating debts?
Debt consolidation is not without its risks, however. First of all, you’re locked into an installment loan with a debt consolidator. This loan must be paid on time and often will not be postponed.
Student loans, for instance, will be put into forbearance and even deferred due to extenuating circumstances. By consolidating your debt, you lose that benefit. You must pay that debt, otherwise, it becomes past due and could go into default.
Credit card debt often has minimum payments which are quite low compared to the amount of debt you have. Debt consolidation has one payment required every month, and that payment may be much higher than your credit card minimums.
Another risk is that debt consolidation is likely to hurt your credit in the very short term, making it hard for you to get more debt. But this effect goes away over time. It’s also likely to improve your credit very quickly, as you will pay more of your debt down faster.
Debt consolidation is not without its costs, either. They usually require origination fees, which will be up to 5% of your total debt! Not all debt consolidation services require this fee, though, so do your research and make sure you understand all the costs!
There are also late fees for not paying on time, penalty interest, and cancellation fees if you decide to close out the account.
Should I consolidate my debt?
Some banks will offer debt consolidation services to you at a low rate. If you can do this to your credit card debt or high-interest personal debt, this may be a wise decision.
This should not be confused with a balance transfer. A balance transfer is when you take your credit card debt balance on one card and transfer it to a lower interest rate card. Most banks offer this service, and some even include a 0% APR for a short period.
Overall, you should consolidate your debt if:
- You can afford the quoted payments over that period
- You will get a lower interest rate, allowing you to pay less over the life of the loan
Frequently Asked Questions
How long does debt consolidation stay on your record?
The debt will stay for 7 years. You settle a debt instead of paying in full. It will stay in your credit reports as long as the individual accounts are reported
Will debt consolidation save me money?
Yes, debt consolidation often saves people quite a bit of money. While it’s not guaranteed that you’ll save money, it does happen pretty often.
Do debt consolidation loans hurt your credit?
Debt consolidation will help your credit if you make on-time payments or consolidation shrinks your credit card balances. Your credit may be hurt if you run up credit card balances again, close most or all of your remaining cards, or miss a payment on your debt consolidation loan.
What are the drawbacks of debt consolidation?
Debt consolidation is a wiser choice to reduce the number of payments and lower interest rates, but this is not always the case. Sometimes the interest rate of the consolidation loan may go higher than the original loans, so one should make sure that the consolidation of all the debts into one loan is profitable.
What are the types of debts we may consolidate?
Student loans, medical bills, credit cards, unsecured personal loans, and payday loans are the few types of loans you may consolidate.
Debt consolidation is a better choice for people who cannot manage a huge amount of debt. If the heavy rate interests of multiple loans bother you, then you may use a debt consolidation method. Choose the company that provides debt consolidation loans with low interest and brings down the amount to settle, then work on the debt consolidation loan that will help you to settle all your debts.