– Shiv Nanda
If you have to repay multiple debts like credit cards or personal loans, consider debt consolidation. It is a way to pay off existing debts with a new loan. You can turn multiple loan payments into one and pay it off at a lower interest rate. Since there are a lot of options under the umbrella of debt consolidation, understanding its ins and outs can get complicated. You need to be aware of the common debt consolidation myths floating around.
In this article, we will debunk 6 common debt consolidation myths.
- Myth 1: Debt Consolidation Reduces Debt
Debt consolidation will not reduce your debt. Instead, all your debt will roll into the loan and you will have to make the monthly payments against that balance. You can consolidate students loans, home loans or credit card loans. Debt consolidation will help you pay off these loans in one go, but you will have to pay off the debt consolidation loan within the specified time period.
- Myth 2: Debt Consolidation Will Hurt Your Credit Score
Debt consolidation loan shaves only a few points from your credit score. The method you choose also determines how many points are taken off from the credit score. For instance, choosing a personal loan will affect your credit score differently than a balance transfer credit card.
Your credit score will be affected only temporarily but it will be worth it if you can repay the loan on time. In fact, making timely payments will improve your credit. Payment history accounts for 35% of your credit score.
Myth 3: Debt Consolidation is Expensive
The interest rate on debt consolidation loans varies from one lender to another. However, they are lower than the average rates on credit cards. For those with an excellent credit score, the interest rate will be as low as 6%.
The interest will be the only cost as most debt consolidation loans do not carry any extra fees. If you choose any other loan, you may have to pay a one-time origination fee which covers the costs of processing the loan. It may also carry a small fee for late payments or processing checks.
- Myth 4: Applying for Debt Consolidation Loan Takes a Long Time
Many think that applying for a debt consolidation loan and its approval takes a long time. However, most lenders are offering instant debt consolidation loans and the entire process is online.
If you have the necessary documents ready, the online loan application process will take just a few minutes. Even the e-approval and loan disbursal is quick.
- Myth 5: All Debt Consolidation Loans are the Same
There are several types of debt consolidation loans. The main types include:
1. Debt Consolidation Loan: These loans are designed to help you consolidate your existing debt. Ideally, the lender will offer lower rates or better terms as compared to your existing debt. If the loan is approved, the lender will pay your existing debt on your behalf. You will have to pay the lender a lower monthly amount. The approved loan amount depends on how much debt you have.
2. Home Equity Loan: If you own property and have outstanding personal loans, you can consider a low-interest equity loan to consolidate your debt. Your home will be the collateral in this case.
3. Unsecured Personal Loan: This can help you pay down your outstanding debt on your own. But, there is no guarantee that you will be approved for the entire amount you need to repay.
4. Balance Transfer Credit Card: With balance transfer credit cards, you can consolidate debt from separate accounts into one card. You can then pay it back over a low- or no- interest period.
- Myth 6: You Can Consolidate All Types of Debt Together
All types of debts cannot be consolidated together. For example, a debt consolidation loan can be used to pay off multiple types of high-interest debt like credit card debt. However, it cannot be used to pay off student loans. For that, you have to consider student loan consolidation. Consider the debt you want to consolidate and choose the right option.
Research your options carefully and seek professional guidance if necessary. Choosing the right debt consolidation will help you pay off debt quickly. Apply online for a debt consolidation loan instant approval.