A debt consolidation loan is an option if you want to get rid of your debt.
Debt consolidation involves combining several debts into one debt. Here are some popular ways to consolidate debt, in addition to a consolidation loan.
There are many pros and cons to debt consolidation, as well as myths. Letâs dispel some myths before we proceed.
Myth # 1: Debt Consolidation Repays Less Money
Consolidating debt is not debt settlement. A debt settlement is where the consumer agrees to pay less than what he owes. Itâs possible to make it sound too good to be true. It can take time to settle a debt. This could seriously affect your credit score and cause you to pay more taxes and fees. There is no guarantee that the final settlement will be less than what you would have paid if it had not been for this.
Consolidating debt does not affect the amount of your current balances. To pay off smaller debts, you simply take out a larger loan.
Myth #2: Consolidating your debt can hurt your credit rating
Your credit rating can drop a few points every time you apply for credit. There is no rate buying window when you apply for debt consolidation loans. Each request will result in a new inquiry on credit reports, which can have the potential to lower your score.
However, theÂ ConsolidationnowÂ consolidation loan does not affect your credit score.Â Here are the reasons.
Credit scores are based on the following:
- Your payment history
- Your credit utilization rate is the amount you owe on credit cards.
- Your credit mix is the combination of different credit types (credit cards or installment loans, mortgages, etc.).
- Your credit accountâs age
- How many times you have applied for credit (requests) recently
A debt consolidation loan may be able to increase your credit score in certain cases. This is the most common outcome for those who take out this type of loan to pay off their credit card debt. Your usage rate will decrease when you pay off your credit cards. This is because your revolving debt and not your installment loan debt are considered. Your credit score is affected by your usage, so paying off your card debt could help you improve your score.
You will also see a positive change in your credit score if there was no installment loan on your credit reports before. You could even improve your credit score.
Myth #3: Debt consolidation takes time
Consolidating debt is not difficult. You can consolidate your debt in days if you are eligible for a consolidation loan. The following factors can affect the timeline:
- Now is the time to explore loan options
- You can qualify for credit now, or you need to improve your credit score.
- How fast the lender approves and processes your request
- The time it takes to receive funds (usually within a day or two of approval).
Myth #4: Debt consolidation is expensive
Consolidating debt is not free. Many lenders charge a setup fee and a lender fee. The interest rates charged by those who donât charge fees are usually higher than those who do.
Consolidating debts can help reduce overall costs. A personal loanâs interest rate can be lower than that of other debts you wish to consolidate. This is particularly true if you have credit card debt.
Debt consolidation is a smart way to pay off your debt if you do your research on the fees and consolidation loans.
Myth #5: Debt consolidation equals more debt
One of the biggest dangers of consolidating debt is increasing overall debt. This happens when you take out a loan to pay off credit cards, then increase your credit card balance.
This myth can only be broken by you.
Yes, it is possible to add more debt if your credit cards are paid off with a new loan. However, if you have a sound financial plan, it is unlikely that your debt will increase.
It is a great idea to close credit card accounts as soon you have paid them off. It wonât affect your credit score. One, it is better to get out of debt than to protect your short-term credit score. The damage to your credit score is likely to be minimal. While you might lose points if your account age drops, points will be earned when your usage rate falls.
Deleveraging has many benefits that outweigh temporary fluctuations in credit ratings.
Before you apply for a consolidation loan to consolidate your debt, it is important to take a look at the reasons behind your debt. Many people believe that debt is the result a financial situation beyond their control. Sometimes, debt is due to overspending or a poor budgeting system. You will reap the benefits of debt consolidation no matter which category you fall into.