Debt consolidation, while clearly being an effective debt solution is plagued by a lot of myths. These misconceptions often lead to the failure of the debtor to get out of debt completely and permanently.
Before you work on this debt relief option, you may have to separate the truth from the fiction. It pays to know what this solution can really do for your credit problems so as not to make the wrong expectations. That could lead to disappointments and abandonment of the program if one is not careful.
There are two types of debt consolidation: debt consolidation loans and credit counseling.
Debt consolidation loans, require the debtor to take out a huge loan that is enough to cover their other debts. You need to look for a loan that has a lower interest rate than your current APR (annual percentage rate). Not only that, the ideal loan should require lower monthly payments compared to what you are paying for at the moment. Here are the popular myths surrounding this type of debt consolidation.
Fiction: You always need a collateral when taking out a loan.
Truth: While it can help you get lower interest rates, this is not always ideal. In fact, it may be viewed by financial experts to be unwise if you put your home (or any valuable asset) on the line for your debt.
Fiction: A good credit score is a must.
Truth: Like the previous misconception, it is not true that a credit score is always needed. Although it can also help lower your interest rates it is not a compulsory requirement for you to avail of this type of debt solution.
Fiction: Using a loan is the first option to get out of debt.
Truth: The whole concept of debt consolidation loans is similar to digging a hole to cover an existing one. It may be effective but you are not really solving the problem. It is like you are creating a new problem to get rid of another. There is no doubt that it can be effective but you have to make the commitment to finish what you started and stick to the new payment plan of your new loan.
In credit counseling and debt management, you will also encounter a couple of myths that fool other people into making false expectations about its results. This basically involves hiring a third party company to help you get out of debt. A credit counselor will help you analyze your finances and manage your debts by allowing you to make single payments while they take care of distributing it to your creditors. They will negotiate with the creditors for a longer payment period that will allow you to make lower monthly payments. To avoid being part of the statistics that failed in this debt solution, you need to get your expectations right. Here are the misconceptions that you need to avoid:
Fiction: Debt counselors can help negotiate for a reduction on your debts.
Truth: Although you will be making lower monthly payments, you still end up paying for your total debt balance. Debt settlement is the debt relief program that offers debt reduction. If this is what you need, then credit counseling or debt management is not the right program for you.
Fiction: Credit counseling companies charge differently and offer varying programs.
Truth: The government is closely monitoring debt relief companies so you can expect that there are rules to make charges and processes standard. If you think that one company is not helping you, consider if you are using the right program altogether. Even if you shift companies, it may produce the same results. There are other debt relief programs that you can avail so research on your different options first.