If your debt is negatively impacting your finances, you’re not alone. It’s estimated that in the USA alone, there’s more than $623 billion in late or overdue household debt.
While cutting corners and trying to increase your monthly payments can help, it usually isn’t enough to make you debt-free. However, consolidation of debt is a viable option.
A debt consolidation loan is one way you can pay off outstanding debt and only pay one payment each month. Unfortunately, there are a lot of misconceptions about debt consolidation loans out there.
To set the record straight, here are the top five myths Ballast Associates wants you to know about debt consolidation loans:
1. Debt Consolidation Eliminates Your Debt
Paying off your debts with a consolidation loan does not reduce the amount or eliminate them. To the contrary, your debts rolled into one payment, which you make monthly payments against the total balance.
The notion of completely eliminating debt is promoted as a form of debt relief called debt settlement. This usually involves hiring a debt settlement company who asks creditors to reduce the total amount you currently owe.
While this sounds like a quick fix, it’s expensive and can destroy your credit. The better option is to seek advice financial professionals like the ones at Ballast Associates who can help you consolidate your debt while protecting your credit.
You’ll Pay Less Interest
If you have good credit, your interest rate on a debt consolidation loan could be lower than the rate on your existing debts. However, the total interest cost may increase if you extend your repayment terms. A lower rate and monthly payments may improve your cash flow, but extending the terms means you’ll also pay more interest.
It Ruins Your Credit
Debt consolidation loans require a hard pull on your credit, but it usually only drops your score by a few points. In addition, your credit might improve when you consolidate your debt. Especially if you’re making your payments on time every month. This factor alone equates for 35 percent of your FICO score.
It’s Expensive
Debt consolidation loans vary but are usually lower than the rates on credit cards, with some starting as low as 6 percent for applicants with a FICO score of 720 to 850. In addition, many debt consolidation loans come with no extra fees, so the interest is your only real cost. Other types of loans may have an origination fee, which means you’re paying for the loan company to process the loan. You might also be charged if you make your payments via check or with the help of a company representative.
It Takes Too Long for Approval
Some people think that they’ll have to haggle with lenders, repeatedly send documents and possibly even have to meet in person. Most debt consolidation lenders offer online applications where you can upload necessary documents through a secure online portal. The entire process can only a few days up to a week. If you prepare all of the necessary documentation prior to applying, you can speed up the process even more.
The Wrap Up
When it comes to debt consolidation, only you know what’s best for the personal financial situation. The key to getting out of debt is understanding how you got there in the first, learning how to budget more diligently and not repeating the same mistakes twice
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