Misconceptions about Debt Consolidation
Like many things, there are often things that we do not understand about certain financial terms and or financial products or offers that are available to us.
As a result, ideas are formed in our minds but the reality is that these ideas may not exactly be true, hence they are known as misconceptions. When it comes to debt consolidation, the same is true. There are quite a few misconceptions regarding this and this applies to debt and finances as well.
Therefore, below we will discuss some of these misconceptions so that you can walk away from this having a more clear idea about Debt Consolidation as a whole.
Debt consolidation loan requirements
Firstly, to consolidate your debt, you will need to take out a loan. Therefore, it will be quite difficult to do this if you are blacklisted or if you have a bad credit score. It will also be quite difficult to get a loan to consolidate your existing debt if you have become overextended and would not qualify for a loan.
You will need a decent enough credit score to qualify for a loan to fully cover your debt. For this, you will need a good to excellent credit score and you will need to be able to pay this loan amount back.
You will need to have a nice, steady income. It will be difficult to get a debt consolidation loan if you have an unstable income. The reason it is this way is that you will be committing to paying back the consolidation loan over a long, period and so this will mean that your income will need to be able to cover the monthly instalments not only now, but most likely for a few years to come as well.
What type of interest rates do you have?
Your debt needs to be made up of multiple relatively high-interest rate debt and in reality, it also needs to be quite a lot of debt. You will not need to get a debt consolidation loan if your debt is currently at a lower interest rate than you would receive on a consolidation loan, especially if you can pay it back within a year. The high-interest rate debt refers to debt like credit cards, personal loans and those sorts of high-interest rate credit percentages. If you can pay your debt off in a year then it will not be necessary to get a debt consolidation loan, rather work out a plan that will help to pay off the debt that you have within the time you have. You need to have quite a sizeable amount of debt to consider a debt consolidation loan.
Before applying for a debt consolidation loan, take a look at your debt and work out whether it is made up of high-interest rate credit and whether it will be beneficial to get a debt consolidation loan.
More cash flow does not mean more credit
One of the biggest misconceptions is that you can consolidate your current outstanding debt with a loan and then free up income to go out and get further credit with your income that is not being spent on your multiple different monthly credit repayments.
This is not the case at all, you only have one consolidation loan, you cannot get a consolidation loan and then go out and get more debt and then get a further debt consolidation loan on top of your existing one.
Remember, you still owe the same amount of money with a debt consolidation loan as before with the multiple credit repayments, it has just been consolidated into a loan for the same amount, just over a longer time.
The debt does not go away
A debt consolidation loan does not get rid of your debt, but rather just moves it onto one convenient loan. So once the debt is paid from the loan that you have taken out to consolidate your debt providers, you will then need to pay the bank or debt solution company back for paying off your other debt providers.
The reality of this is that you can still fall behind on the consolidation loan if you are not careful with your spending.
You cannot go back to the way that you spent money in the past once you have gotten a debt consolidation loan. You will need to sit down and figure out how best to work with the money that you are earning every month and change your old spending pattern. This is important so that you will not fall back behind and rather build on your old habits.
Draw up a budget for yourself with your current spending habits versus your income and work out what are necessities and what you can do without. This will help you decide whether you need some changes or not.
Is it helpful to get a debt consolidation loan?
Debt consolidation is a means to an end for many, but it is not a quick cure for your debt. It is going to take some time to get the debt consolidation loan out of the way with making sure that you stick to the payments, and if possible, pay more when you are in a financial position to do so so that you can crush that loan even quicker. It will take time but it will mean that you can breathe again and not feel overwhelmed by the month-end credit repayments. You must remember that it is not a quick fix, but it is a means to an end.
Debt consolidation loans have many misconceptions, however, these loans provided by banks and debt solution companies, have proven to be helpful to many people. So if you have been looking into taking this, route to help your finances then the above information is there to help you rule out anything that you may have heard or thought that is not necessarily the truth.