When you’re looking for ways to get on top of your debts, you might be confused by the range of options available to you. One of those which you might have discovered could be debt consolidation. When it comes to what is a consolidation loan though, there are a lot of misconceptions surrounding it.
Opinions on the matter differ as well. Some people swear by this debt solution while others wouldn’t dream of using it. To separate the fact from the fiction, we’ve broken down some of the most common misconceptions:
Fact 1: Debt consolidation doesn’t reduce your debt
Unlike many debt solutions, a consolidation loan won’t actually reduce what you owe. It works similar to this:
- You borrow an amount of money equal to – or exceeding – the value of your debts
- You take this money and repay your lenders with it
- You’re then left with one creditor to repay (the loan provider)
You’re essentially transferring the sum of what you owe onto one lender. This is where it’s vital you get a favourable deal on your loan as you want to be paying less interest – or smaller payments – overall. This means, by using a consolidation loan, you should have more money left over each month.
Fact 2: It should benefit your credit score
One common misconception is that consolidation loans damage your credit score. This isn’t completely true. Yes, in the short term, taking out another loan might have a detrimental effect on this rating. However, as you close accounts, make payments to the consolidation loan provider on time, and shrink your credit utilization ratio, all of these should have a positive effect on your score.
The only way a debt consolidation loan would be ultimately bad for your credit rating is if you didn’t make the monthly payments – or defaulted completely. Assuming you don’t do that, this solution can eventually benefit your credit score.
Fact 3: Those with bad credit can still apply
If you have bad credit, you might feel the financial world is closed to you. The good news is this isn’t completely true with debt consolidation loans. Perhaps it’s because you’re ultimately transferring debt from one lender to another but many providers will consider those with a less than positive credit history.
Finding debt consolidation loans for bad credit should be relatively straightforward. Although you may be recommended a secured product (because of your credit history) you shouldn’t be refused straight away just because of your credit rating.
Fact 4: It’s not as time-consuming as you might think
Although we’ll admit the process of closing your existing accounts down one-by-one could be an arduous task, one benefit of a debt consolidation loan is its simplicity.
Once you’ve resolved matters with your current creditors, you’ll only have one company left to repay. That means one lender, one monthly payment, and one interest rate. In the long-run, not juggling payments to different creditors will probably free up more time.
Fact 5: Government debt consolidation loans do not exist
This is where the solution can get a bad reputation. Some companies advertise ‘government debt consolidation’ or use similar phrases. The truth is, there is no such scheme. Although it’s unclear why some companies choose to advertise a product which doesn’t exist, there are some government-related debt solutions out there. These include:
- IVAs (Individual voluntary arrangements)
- Debt relief orders
If you come across a company selling ‘government debt consolidation’, they may be trying to mislead you. In this situation, you might want to look for a consolidation loan elsewhere.
About the Author
This article was provided by Tom Chapman, content manager at Consolidation Express. A UK-based consolidation loan broker, the company – and it’s advisors – have a wealth of knowledge when it comes to this debt solution.