If you have a significant amount of debt and you are really having a tough time to pay it off, you may have taken help from a debt consolidation company. Without a doubt, debt consolidation can really lead to a positive outcome, but various myths also exist about the process and all those companies offering this service. Owing to this, it is imperative you have a holistic understanding of actual facts so that you can make a smart and informed decision.
Let us discuss some of the common myths surrounding the debt consolidation and the reality behind these myths, in detail –
13 Biggest Myths Behind Debt Consolidation Debunked
MYTH #1: Paying debt consolidation companies in advance
In 2010, debt relief industry was affected by new rules passed by the FTC (Federal Trade Commission). As per the rules, the debt consolidation companies were directed to negotiate, settle, and cut down the term of the consumer’s debt and the consumer should also agree to the settlement before the consumer make any payment.
MYTH #2: Debt consolidation removes debt record from the credit report
Generally, this is not what happens. In most of the cases, your debt record stays on your credit records and it stays there for seven years. Fair Credit Reporting Act (FCRA) allows the accounts to stay on the credit report even after your debt has been settled. As per the latest scoring algorithm from FICO, delinquent accounts are not considered once they are finally settled.
MYTH #3: Debt consolidation is an expensive option as compared to others
If you really think so, then you haven’t compared the debt consolidation options carefully. Credit counseling has often proved beneficial for the consumers. But, over a five-year plan, if you own $20,000, you may have to pay a total amount of $30,000 including interest and fees.
MYTH #4:Debt negotiation can make you debt-free
Well, this can only be possible if you only have credit card debt, but you need to stay loyal towards the financial commitment of the program. Moreover, debt negotiation is not the solution for debt from most student loans, alimony, taxes, or child support.
MYTH #5:Debt consolidation companies are unreliable
Make sure you have done your some research work before choosing a debt consolidation company. You can inquire such as how long the company has been in the business. What is the total number of satisfied customers and details about the background of the management team?
MYTH #6:Debt consolidation is the same or similar to debt management, debt settlement, and bankruptcy.
Although the terms are commonly used interchangeably, there are some differences. One element that set it apart is that it is not a program but more of a strategy.
Debt consolidation can help you combine various unsecured debts such as – payday loans, credit cards, personal loans, medical bills, etc. Credit Card Debt Management and debt settlement involve dealing with the counselor or a company, the main motive is to cut down the owed amount. Bankruptcy is a legal proceeding comprising of a date with a judge.
MYTH #7:For consolidation you need to take help of an agency or a lawyer
While you can easily find companies and counselors who can help you get out of your debt, you can consolidate your debt on your own as well. If you really want to do it on your own, it is imperative you have all the information how you should do it and what are your available options. If you are good with money, then this DIY option will really benefit you. If you adopt this method, your credit bureau or bank may not be aware that you have considered debt consolidation. However, if you have tried settling your debt, that may send up some red flags.
MYTH #8:Debt consolidation is only opted by the financial losers
This is surely a myth. Structuring and reorganizing your debt is a favorable principle used in the business and by financially well-off. This is one of the best ways through which you can organize and structure your debt in a manner that can be advantageous to you.
Also Read: Student Loan Debt Consolidation
MYTH #9: For debt consolidation, you need to be a homeowner
This is not the actual truth. Well, whether your home is paid for or not, it doesn’t make any difference, but make sure you have some home equity. There are other methods to reorganize your financial obligations even if you are not a homeowner.
MYTH #10: Debt consolidation is always a scam
The fact cannot be denied that there have been some scams around debt consolidation in the past and not all consolidation loans or plans can help save you money. However, there are reputable companies that offer debt consolidation plans or loans which can really help you in lowering down your monthly payments so that you can free some amount for your daily expenses.
MYTH #11: Debt consolidation leads to more debt
Debt consolidation can be termed as one loan which is used to pay off your other loans. Therefore, believing you have good terms on your loan, there is no practical reason that debt consolidation can lead to more debt. In fact, it helps in lowering down your total debt. But, it can lead to more debts for all those people who are not ready to change their habits. Once you have paid off your credit cards with debt consolidation loan, make sure you avoid using them again.
MYTH #12: Interest on consolidation loans is fixed
Whether you have plans of using an unsecured loan, a HELOC, or a balance transfer, from your credit card for consolidation, it is imperative you have gone through the fine print. Low-interest rate might be having some fixed tenure. You should know what may activate changes in interest rate and make the most of the lower-rate period to pay off most of your debt if not all.
MYTH #13: Debt consolidation services are free
Debt consolidation is not free. Of course, depending on the type of debt consolidation industry service you have opted to use, some methods may cost you less as compared to others, but there is some amount you need to pay for consolidating your debt. Debt consolidation loans are misinterpreted as free quite often, but these do have some fees, interest, and various other charges you need to pay.
Similarly, you will also have to pay some amount for professional debt consolidation services. If you have taken services of a debt consolidation company, you have to pay a commission fee in addition to periodic administrative fees.