Benjamin Franklin once said, “I would rather go to bed without dinner than to rise in debt.” Unfortunately, there are many people that rise every day wondering how to meet the monthly payments on their loans and credit cards.
When your debt starts getting out of control, you should consider debt consolidation as one of the possible solutions. You may have questions about what debt consolidation achieves and how it works, so here in this article we will demystify these debt consolidation myths.
Debt Consolidation Lowers Your Debt
Debt consolidation cannot lower the total amount that you owe! What it can do is help you lower the amount of interest that you pay on what you already owe, and reduce the amount of late fees that you may be incurring by not meeting the due dates of your monthly payments.
Debt Consolidation Immediately Improves Your Credit Score
Because debt consolidation involves taking a new loan at a lower interest rate to cover all other debts, the process immediately makes a small dent on your credit score. However, this small decrease shouldn’t discourage from taking on a project to pay down your debt faster. By making your monthly payments through a low-interest debt consolidation loan, you are taking a bigger chunk of the principal and improving your credit score little by little.
Debt Consolidation is Only Possible with Good Credit
This is a myth. The main requirement for debt consolidation is to find a lower-interest loan. Even if their credit score prevents them from qualifying for an unsecured loan, homeowners have the option to take out a secured loan using their property as collateral. Before taking a Home Equity Line of Credit (HELOC), homeowners should understand all the consequences from this financial vehicle.
Debt Consolidation Requires Advanced Fees to Guarantee Loan
This is a major red flag. The FTC warns customers to be weary of companies requiring pre-payment to “guarantee a loan”. No company can guarantee you a loan or even represent that a loan is likely. While fees may be due after you get the loan, they will never be due before.
Interest on Consolidation Loans is Fixed
Whether you use a HELOC, unsecured loan, or a balance transfer offer from a credit card for your debt consolidation, make sure to read the fine print. That low, low interest rate may be fixed only for a couple of years. Understand what may trigger changes in the interest rate, and take advantage of the lower-rate period to pay off most, if not all, of the debt.