Owing money to many creditors and keeping track of multiple debts can be overwhelming. You spend the better half of your day settling money matters with your bank and right when you get done, you get an angry call from a payday company.
For some debtors, especially the ones who are already struggling with loans and arrears, such situations can be particularly stressful. It may seem to them that they are juggling more tricky matters than they can possibly handle.
But do not give up. As with most financial dilemmas, there are actionable solutions for this one too. Taking out a personal loan for debt consolidation could be a suitable debt management option for you.
The concept behind debt consolidation is pretty straightforward: instead of tracking and managing your debt repayments separately, you merge all of them into a single loan. This way, you only have to pay towards a single consolidated loan, and you can avoid the hassle of individually tracking debts to different creditors.
Despite many people taking out a personal loan as a debt consolidation loan in the UK, there are still plenty of misconceptions surrounding the process of debt consolidation. Today, we will be contributing to your knowledge of debt solutions by busting some of the myths about debt consolidation.
Myth 1: Debt Consolidation = Less Interest
It is a common misunderstanding that debt consolidation saves you money on interest. The truth is it depends. While most people assume that paying back a single loan with a fixed interest rate results in less overall interest than multiple debts with their own interest rates, it is not true.
Most lenders would look at your credit score before determining a suitable interest rate for you. If your credit score is higher, you are more likely to get a better interest rate. If you are going for debt consolidation with a bad credit score, you may have to brace up for higher interest rates.
Assuming your credit score is strong, the overall interest on your single loan could be lower than the total interest rates of all the debts you owe. This will lower the amount you pay in interest but keep in mind that your debt level would not change.
Myth 2: Debt Consolidation is the Cheapest Solution Overall
Some people erroneously believe that combining different debts to a single loan would reduce their overall debt. This is a common misconception about debt consolidation. Debt consolidation does not reduce the total amount you owe.
If you decide to take out a personal loan for debt consolidation, the amounts you owe to individual creditors will remain the same, only the interest rate might change. In this way, debt consolidation is more of a debt management strategy than a debt solution.
Say you owe £1000 to five different creditors and your debt totals up to £5000 with interest. Should you decide to consolidate, you would still need to pay back five lots £1000 except now you have to make a single payment towards a collective debt of £5000 every month. The interest rate is subject to change depending on your credit score.
Myth 3: Debt Consolidation with Poor Credit is Impossible
This is not true. Debt consolidation is in fact a debt management solution for those with bad credit. If taking out a personal loan for debt consolidation was not an option for people with poor credit scores, lenders would miss out on people who most need this debt management solution.
People who are struggling to repay multiple debts are also the ones who are most at risk of dipping credit scores. Keeping track of so many financial commitments is vital since one missed payment could result in a significant drop in credit score but not so easy.
That’s precisely what debt consolidation helps with. By taking out debt consolidation loans for bad credit, you are assuming the responsibility of your finances – and, likely, your willingness will not go unrewarded.
Debt consolidation is one of the very few debt management solutions that are open to people with a patchy credit history. Ultimately, all you are doing is shifting credit and showing a real resolve to sort your money matters, something that is mostly favoured by creditors.
Myth 4: Debt Consolidation Inevitably Leads to More Debt
The rumour that debt consolidation eventually leads to more debt probably originates from the fact that taking out a personal loan for debt consolidation does not lower your overall debt or guarantee lower interest rates.
While all that is true, it doesn’t in any way mean that debt consolidation would land you deeper in debt. In fact, it is a debt management strategy that aims to achieve the exact opposite by helping struggling debtors break a pattern of missed payments and hefty late penalties.
With debt consolidation, you do not have to go through the hassle of dealing with multiple creditors and are, therefore, less likely to miss or forget a payment deadline. Instead, you need to make only a single payment towards your debt every month and the rest is handled on your behalf.
Myth 5: Debt Consolidation Adversely Impacts Your Credit Score
It’s true that taking out a personal loan for debt consolidation will impact your credit score but not in the long run.
As with all debt solutions, your credit score is more likely to drop once you apply for debt consolidation, but this is only temporary. As long as you stick to your new monthly payment schedule and continue paying towards your debts, you will rebuild good credit history. Eventually, the total amount you owe will drop and your credit score will begin improving.
Money Advisor: Swift Debt Help & Relief
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