According to www.incharge.org, the businesses that use debt consolidation for paying credit card debts revealed that they pay almost 20% interest on the cards. If you are someone who is looking for the best way to get out of all the withstanding debts, you might want to know about debt consolidation. Most of the times, it has been observed that different people have different opinions about debt consolidation. The truth about consolidating your loans is that it is a great financial strategy, which is used by a number of business ventures that are trying to control the debts. A number of myths are also known to revolve around debt consolidation.
Given below is a list of the myths that you need to understand and know the truth that lies behind debt consolidation.
Debt consolidation is a huge scam
Debt consolidation is one of the legitimate avenues for paying off the debts. However, it is extremely important that you conduct a research on the agencies that are offering this solution. The industry of debt consolidation faced huge drawbacks during the Great Recession of 2008. A number of predatory and false lenders started popping up here and there and took advantage of a number of businesses that were drowning in neck deep debt.
It is important that you look for debt consolidation companies that are reputable and have been established before 2008. Ensure that you avoid the companies that ask for a huge amount of money and have plans of not paying back to the creditors. This technique is known as debt settlement.
Debt management plans and debt consolidation are same
The debt management plans and debt consolidation is undoubtedly similar but they have a number of differences. When you decide to consolidate your debt, you are actually taking a loan from a credit union or a bank. The rest of the things are completely dependent on you. Ideally, you should use your funds for paying off to the creditors and have a single monthly payment. The management plans are known to work differently as no loans are involved. You have to take care of a single monthly payment but it is going to be in accordance with the programs offered by a particular credit counseling agency. The counselor calculates the monthly payment that a borrower is capable of affording, and then he determines the time that will be taken to eliminate this debt. The payment is sent to the agency, and the agency distributes this fund to the creditor on basis of the amount that has been agreed for clearing off the entire debt.
Debt settlement is considered to be a cheap way for squaring the debts
You might have come across billboards that state that you can settle all your debts for the fraction of the total amount that you owe. It is true that it sounds like the best possible deal but on the other hand, it is extremely good and it cannot be true. What the billboard is never going to mention is that the companies of debt settlement charge a substantial fee, which is almost 20 to 25% of the complete settlement.
The debt settlement companies are known to stop the payments to the creditors on basis of the negotiation tactics and they negotiate with all the creditors individually, which takes a huge amount of time. During this time, the interest and the late fee start piling up and chances are that a missed payment will also lower the credit score.
The fact about debt settlement is that the agency hopes to reduce the entire amount by 50%. When you add the fees of the agency, the penalties on the interest rate, and the extra taxes, you are going to save around 10 to 25%.
Debt consolidation loans can save your money
There are different kinds of debt consolidation loans, and one among them can be a proper route of saving money, but this definitely takes research. The choices that you have include straight debt consolidations from credit unions or banks, home equity loans, or the unsecured personal loans. The purpose of the debt consolidation loans is to save money, however, the credit score plays an important role in the rate of interest that is received. If there is a lot of debt on your credit card, the score can suffer to a great extent.
This also means that your business has to pay a high rate of interest. This is why it is extremely important to conduct research properly. If the rate of interest that you are paying on your debt consolidation loan is not less than the amount that you are paying on the bill of your credit card, the debt management plans can be a better option. These plans are known to have agreements that can lower the rate of interest despite the credit score. To gain more information on this, you can visit the reputed website of nationaldebtreliefprograms.com.
Debt consolidation can lead to even more debt
One of the most common things that businesses hear is debt consolidation loans do not fix the problem at all. It can definitely wipe all the debts clean, but if your business cannot change the spending habits, chances are that your business will go back to the place from where it started. A number of tools are available on the internet, which will help you to create a proper budget and provide information about various financial practices. It is crucial that you increase the financial literacy as it is considered to be important for staying free from the unwanted debts.
Debt consolidation can hurt the credit score
Two important factors that are associated with your credit score include credit utilization and payment history. In the beginning, there are chances that the credit score dips slightly because a new credit is opened through a debt consolidation loan. However, it is also capable of recovering quickly and rising consistently, as you make the payments on time and reduce the total money that you owe.
When you have a proper knowledge of all the methods that are associated with debt consolidation, you will not be fooled by what other people are saying.