Facts and Truth Behind and Debt Consolidation You Need to Know Up Front
Most people struggling with their debt and personal finances are often faced with the dilemma of whether or not to go for a debt relief program to take some of the money out of their pockets. This is due to the common misconception about these programs. Ideally, you can opt for these programs and expect to get rid of your debt after a specific period of time that can range from 3 to 5 years.
The most common way to get rid of your debt seems to be to settle it with your creditor for a reduced amount, but if you have multiple debts in your name, the best alternative seems to be consolidating your debts.
- Debt consolidation is a process in which you pay off your existing debt with a new loan or a new, larger line of credit.
- Since all of your existing debts will be repaid with this loan, you will now only have one loan and one creditor to repay each month.
- This loan will carry a much lower interest rate and give you more time to pay off its extended loan term.
This way, you can get the much needed relief from managing multiple loan accounts, eliminating the risk of failure and accrued interest and penalties.
If done correctly and under the right circumstances, a debt consolidation loan can help you take control of your debt as well as your personal finances. However, many entities claim such offers but are ultimately unable to deliver the desired results. They may even charge you illegal fees in and for the process. So it is suggested that you only rely on reliable sites and sources such as https://www.nationaldebtreliefprograms.com/ if you do not benefit from such a loan from a traditional bank for specific reasons.
Apart from that, it is also suggested that you know the common mistakes people make and the misconceptions people have. It is necessary that you move with confidence in your debt and financial management process, for which you will also need to understand the myths, pros and cons of the process before proceeding further.
- Most people believe that with a debt consolidation loan, they can consolidate all types of debt together. However, the truth is that with a debt consolidation loan which is an unsecured personal loan, you can pay off several high interest debts such as credit cards and payday loans. However, you cannot use it to pay off federal student loans for which you will need to take out specific federal student loan consolidation. You can also consolidate credit card debt using a balance transfer credit card and pay off the debt zero interest within 21 months of the transfer.
- People also believe that they need great credit to consolidate their debt, which is true to some extent because like any other traditional type of loan, the higher your credit score, the more money you will get. favorable terms on the debt consolidation loan or the balance. transfer credit cards. However, you can also qualify for such a debt consolidation loan with good, fair and even bad credit especially if you have a long standing relationship with an institution.
- There are a few people who think they have to pay for a consolidation loan, which is not always true. If you qualify, you can get a balance transfer credit card with no transfer fees or interest charges if you take it during the introductory period and pay it off within that time. However, you are advised to check with the lender whether or not they charge origination fees. Some credit card companies may also charge a balance transfer fee.
- Debt consolidation is not always a scam although there are several companies that can take advantage of your situations. For this reason, you are urged to use caution when interacting with these companies, especially with regard to their service charges. There may be companies that charge a fee to consolidate student loans, which are usually free if you do it directly through the government. Few companies can also charge an advance fee before issuing a loan and you should stay away from these fraudulent advance loan companies. It is best that you follow the list of businesses that are banned by the FTC from providing debt relief services.
- If you choose to follow a debt management plan instead of taking out a debt consolidation loan, you will need to go to a nonprofit credit counseling agency. They will simplify payments because you will potentially pay less interest. You will need to make a one-time payment each month to the credit counseling agency as agreed, and this amount will then be paid to all of your creditors on your behalf until all of your debts are paid off in about five years. The credit counseling company will charge you a monthly fee for its service, in addition to the registration fee.
- People also have this misconception that taking out a debt consolidation loan will hurt their credit. On the contrary, it will not affect your credit because debt settlement will reduce your outstanding loan amount. However, when you open a new account it may result in a small drop in your credit score which is less than five points, but if you open multiple new accounts over a period it will affect your credit score more significantly. Therefore, research your options well in advance to determine what type of debt consolidation loan you might qualify for. Make sure you can make payments on time and every time, as this will show up in your payment history which makes up the bulk of your credit score, 35% to be precise according to FICO.
Therefore, debt consolidation is the best way to find debt relief, although it is not the only way to do it.