Life is stressful as is, and dealing with multiple debts can feel like juggling on a unicycle. If you’ve dealt with such a situation, you know how cumbersome it can be to keep up with the repayments. Moreover, missing your repayments has some serious consequences. A debt consolidation loan is a smart option for dealing with a debt mix.
Debt consolidation loans allow you to combine your ongoing debts into one, single loan. The funds from the debt consolidation loan will help pay off your entire debt. Now, you will only have to pay for the new loan. It is a great way of organizing your debt in order to avoid a default or a payment failure.
When you consolidate your debts using this loan, you can avail a new tenure and interest rate. Most people opt for a debt consolidation loan to lower their monthly payments.
As straightforward as this sounds, people have preconceived notions about debt consolidation. To help you get a better insight, we’ve curated a myth buster, with 5 myths surrounding debt consolidation loans.
Myth: Debt consolidation loans are costly
Fact: The cost of any loan is determined by the interest rate and any additional fee associated with it. But the interest rate is always set up by the lender. The interest that they charge will largely depend on your creditworthiness and affordability. However, debt consolidation loans may cost you less than most credit cards.
A number of lenders would lend you a debt consolidation loan and charge no extra fee. Some, on the other hand, may charge a one-time loan processing or origination fee. The APR is generally inclusive of all these overhead charges. So, instead of comparing interest rates, try comparing the APRs of your loan offers. You may end up finding a cheaper option.
Myth: Debt consolidation may harm my credit score
Fact: Most lenders carry out a thorough credit check before approving a loan application. Each credit check causes your credit score to dip. And, debt consolidation loans have slightly more rigorous credit checks than others. So, a slight dip in the credit score is inevitable.
Debt consolidation can be of great help in boosting your credit score if you’re careful with repayments. Whenever you make timely repayments, it’ll get recorded on your credit report. So, each repayment contributes towards improving your credit score.
Thus, a little dent in your credit score may be worth it if you keep on top of your repayments and manage your debt more efficiently.
Myth: Debt consolidation loans will ‘reduce’ my repayment amount
Fact: This is a common misconception among people. A debt consolidation loan helps you organize scattered debts into a single loan. But it does not reduce or waive off money that you owe your lender. It pays off your existing debts, which leaves you with just a single loan, easing your debt management. All you need to do now is pay off this balance over monthly installments until the debt is over.
Debt consolidation is different from debt settlement. Debt settlement involves hiring a firm to represent you to ask lenders to reduce the amount of money you owe them. Debt settlement can be a risky business as it can hugely impact your credit score. There’s a fair chance of things getting ugly, so choose your options wisely.
Myth: You’ll save a lot on interest
Fact: Debt consolidation loans pay off all your existing debt, leaving you with a single debt to repay. If you’ve developed a strong credit history over time, you may get offers with favorable interest rates on debt consolidation loans. But, if you opt for a longer repayment period, you might end up paying more in interest. That’s because the interest is payable on all your monthly repayments.
To illustrate this through an example, let’s consider a credit card debt of £20,000, at an APR of 15%, and monthly payments of £600. This means your total payable amount would be £25,800, and it would take three and a half years to pay it off.
If you consolidate your debt with a personal loan over a repayment period of seven years, at 10% APR, your new monthly payment would be £332, but your total payment increases to £27,890.
So, how much you pay or save, depends on your credit score, interest rate, and repayment tenure.
Myth: Debt consolidation could push you towards ‘more debt’
Fact: Debt is a vicious cycle for some. Whether or not you fall into a debt spiral, depends on how responsibly you spend your money. If you adhere to a practical budgeting system, you will end up being more judicious with your spending. Debt relief plans can help simplify and detangle your repayments. But if you don’t work on your spending habits, you may end up in debt again.
So, debt consolidation is a way of improving your debt management, to prevent you from falling behind your payments. It does not have a role to play in pushing you towards more debt.
When to consider debt consolidation
- You’re not exhausting all your savings while paying towards the charges and fees.
- The loan is affordable for you,
- You improve your spending habits and keep a check on unnecessary direct debits
- You don’t develop a debt problem. If you do, talking to a debt advice service should be your first and foremost step.
If you find it hard to resist the temptation of using your credit card, it would be better to seek some professional debt advice. Ceasing your credit card service might be a good idea in that case. Try to curb your urge to overspend. If you keep on adding debt, it will gravely impact your finances and your chances of securing a loan in the future.
After learning about debt consolidation loans, if you do choose to get one, we suggest that you shop around a little. Compare loans thoroughly to find yourself the best-suited offer. Visit Loan Broker to find yourself the most favorable debt consolidation loan offer.