Consolidation seems to be the best solution when you have multiple debts. The problem with a lot of debts is that you find it hard to stick to different payment dates, and once it slips through the cracks, you will likely end up paying late payment fees that spiral up the debt.
A debt consolidation loan allows you to borrow a large amount of money that you use to pay off all of your outstanding accounts, so you are left with only one loan to pay off. The purpose of a consolidation loan is to help you get rid of all of your outstanding debts once and for all.
However, there are various myths associated with debt consolidation loans that you must debunk right away.
Myths about debt consolidation
If you have multiple debts that are quite difficult to manage to pay off simultaneously, you can consider consolidating your current debts, but many borrowers have doubts about these loans. Here are the myths about consolidation loans that you should immediately debunk:
- It lowers down your credit score
Having a good credit score is important at the time of borrowing money. If you have a bad credit rating, you will likely get money at a higher interest rate. It is assumed that consolidation loans can ding your credit rating.
The fact is that applying for a new loan can pull five points from your credit score because hard inquiries will show up on your credit rating, but your credit score will improve over time as you make payments.
Since consolidation loans are paid off over a period of months, timely payments show that you have been committed to your financial obligations, so your credit score goes up.
If you want to apply for consolidation loans, you do not need to worry about lower credit scores because they will improve over time as the debt amount reduces.
However, before you apply for the consolidation loans, you should take a look at your credit report to ensure that your credit score is not very low due to one reason and the other.
- Debt consolidation whittles down your debt
Most people assume that debt consolidation loans reduce the amount of debt. This is a big myth. The fact is that consolidation loans do not reduce your debt, nor do they help you save money.
Whether you have credit card bills, student debts, personal loans, or guaranteed loans in the UK, you are going to pay off all outstanding debts by taking a new loan called consolidation debt.
Many people think that debt consolidation loans and debt settlement loans are the same, but they are not. Debt settlement allows you to pay off less than what you owe. This option is generally available only when you have gotten into a debt spiral that severely damages your credit score.
If you want to pay off your debt while maintaining a good credit score, you should opt for consolidation loans. You can use online calculators to know how much it will cost you.
You should figure out lower interest rate options if you find that it costs you more than individual repayments of all outstanding debts.
- Debt consolidation leads to more debt
Another myth that you should immediately debunk is that consolidation loans lead to the piling of more debts. No loan, whether you take out a short-term loan or long-term loan, can throw you in a debt spiral as long as you pay it off on time.
Consolidation loans are notorious for trapping you into a debt cycle because you do not improve your spending behavior. Of course, you are to pay off your debt over an extended period. You must have enough money in your account, so you do not miss on repayments every month.
If you do not improve your spending habits, you will likely run out of money, and as a result, you will have difficulty meeting repayments. A rule of thumb says that you should cut back on your expenses so you can ensure that you will not fall behind in repayments.
The best way is to create a budget. You can use some apps to help you with budgeting. With the help of budgeting, you will be able to track your expenses easily and can stop yourself from overspending.
You should try to set aside money that you have to pay down as an instalment as soon as you receive your payday cheque and make sure that you make do with the money left.
Try to make a lean budget so you can avoid borrowing more money. However, if you come up with an emergency, you can apply to direct lenders for very bad credit loans. Healthy financial habits can help you improve your financial condition.
- Consolidation is not an option for people with bad credit
Many people think that consolidation is only the option for those who have a good credit rating. Some people do not even seek consolidation loans because they have a bad credit rating. The purpose of a consolidation loan is to help you borrow a larger debt to pay off your outstanding loans.
If a lender turns down your application, they may be skeptical about your repaying capacity. Though bad credit applications can be entertained, they must not be too bad. It depends on the lender how flexible they are in entertaining your bad credit applications.
If you have bad credit, you do not need to hesitate from applying for these loans, but before that, you must know whether you meet the eligibility criteria set by your lender.
You can go to the sites of lenders and find out if they accept applications from people with the bad credit score you currently have.
If you cannot get this information on their websites, you can call them. Although there are chances of having a lender sign off on debt consolidation loans for bad credit and no guarantor, it does not mean that there is a guarantee.
Several other factors contribute to the decision-making of the lender whether they should approve your application or not.
- Debt consolidation is skulduggery
Some people think that debt consolidation is a scam. It does not help you pay off outstanding debts but trap you into a never-ending debt trap. This is purely a myth. Debt consolidation is a legitimate way to pay off all of your outstanding debts.
If you are struggling to pay off your outstanding debts, you can take out a new loan amounting to the total outstanding debts, so you will have one large loan to pay down in fixed monthly instalments.
You do not have to pay an extra penny as long as you make payments on time; otherwise, you will have to pay late payment fees.
Debt consolidation is the right type of loan, but you need to ensure that you borrow money from a reputed direct lender. Many people get trapped in a vicious circle of debt because they do not research the lender before borrowing money.
Spurious lenders can pretend to be loyal online lenders, but they may charge outrageously high-interest rates. Beware of such lenders. You should do online research to ensure that you are borrowing money from a reputed direct lender. You can dive into social media sites to know if people have good things to say about the lender.
The bottom line
Debt consolidation loans are associated with several myths, and some of them have been discussed in this blog. Try to avoid borrowing money from an online lender that has no reputation. Do some research, so you do not end up harming your budget and credit score. Stop believing in myths.
Jessica Rodz is the Senior Content Writer at Cashfacts. She has a long career in the field of content writing and editing. Jessica has the expertise in the UK lending marketplace where she has worked with 7 different lending organisations and acquired many responsibilities from preparing loan deals and writing blogs for their websites.
At Cashfacts, Jessica is managing a team of experienced loan experts and doing a major contribution in guiding the loan seekers via well-researched blogs. She has done graduation in Business (Finance) and now currently doing research papers on the UK financial sector.
