Debt consolidation is one of the most strategic debt management approach now, but there are a lot of confusions, misinformation, and misinterpretations associated with it. In fact, debt consolidation, in its primary sense is very simple, which means only one thing as – you are repackaging several of your existing debts into a single bigger loan.
There are various methods, options, and providers to choose to go ahead with debt consolidation, but anyways the primary concept remains the same as getting one big loan to pay off all the smaller debts. Even if this is the case, debt consolidation is often confused with debt management, settlements, bankruptcy and many other concepts. So, here will discuss the top 5 myths around debt consolidation and try to debunk those.
#1. Debt consolidation and debt management are the same
It is not. Debt management agencies usually provide creditor negotiation and financial counseling etc. to their clients to better manage debts and find ways to get rid of it effectively. Whereas, debt consolidation is the process of repacking all your debts into another single one as we have seen above.
#2. Debt consolidation is the last resource for people in a financial crisis
This is false. In fact, debt collection is not to help you get rid of your financial crisis as the consolidated loan also puts the same owing on you, but in a more relaxed way. However, the debt remains the same. In reality, anyone who is getting confused and out of focus with multiple loans can think of consolidation, either to pay off faster as to save money or to get a more relaxed and extended repayment schedule. You can read debt consolidation review of people to see why they prefer to go for it.
#3. Debt consolidation will hurt credit score
Not necessarily. If you do consolidation proper with the aid of a reputable provider and also don’t fail to pay off the consolidation loan as per the schedule, it will not affect your credit score adversely. On the other hand, consolidation can help you improve your credit score if planned properly.
#4. Debt consolidation will lead to a more troublesome debt
It will not unless you are so compromised on your financial discipline. It is imbalanced spending which leads to more debt. With consolidation, all you do is to put all your multiple existing debts at one place possible with an extended, but smaller monthly payment. So, there is, of course, some extra money left with you.
It may be true that you ended up on multiple debt chaoses due to overspending and if so, debt consolidation should be an eye opener to better plan your finances and regain stability over time. If you spend lesser than you earn and save adequately, then you will get out the trouble soon.
#5. Debt consolidation helps to reduce debts
This is partly true as the number of debts reduced to one, but the debt burden regarding money remains the same. If you have four existing debts totaling to $50,000, then your consolidation loan is also for $50,000, and you need to pay it off. It may be possible for you to reduce the interest by paying off the debts faster, but only if you can pay off more than the minimum required monthly.
In conclusion, what you need to know is debt consolidation is a long as any other loans. You have to use your money wisely and then pay it off in this too. It is not a magic wand to prosperity, but a helping hand to make you feel more relaxed and support in a difficult financial situation.