When looking for answers to ‘what is a consolidation loan’, you may find a variety of contradictory information out there. Similar to other debt solutions, everyone seems to have their own opinion on the matter. Some maintain that consolidation loans are a fantastic way to deal with your creditors. Others wouldn’t dream of using another loan to get on top of debts.
As there’s a fair amount of misinformation out there, we’ve detailed the five most common myths we could find regarding debt consolidation:
Myth 1: Debt consolidation reduces your debts
Although some debt solutions will write off your debts – or reduce how much you owe – this is not true when it comes to debt consolidation. It can more be viewed as transferring what you owe.
With a consolidation loan, you borrow an amount which equals or exceeds the total value of your debts. Using this money, you close accounts with your creditors one-by-one until you only have one lender left to repay (the loan provider).
As you’re not shrinking your debts, many may wonder what the point in this solution is. However, the primary benefit of a debt consolidation loan is arguably simplicity. By consolidating all your debts into one payment, you make them much easier to manage. Furthermore, if you get a loan with a better interest rate than what you’ve been paying – or one which requires smaller payments – you could be better off in the long run.
Myth 2: You can get government debt consolidation
Chances are, this is where debt consolidation gets a bad reputation from. Type ‘government debt consolidation’ into a search engine and you’ll probably see a range of companies advertising this service.
Here’s the issue: government debt consolidation doesn’t actually exist.
There are government-related debt solutions out there, such as IVAs (individual voluntary arrangements), bankruptcy, and debt relief orders. However, politicians have yet to back consolidation loans.
Chances are, companies do this to appear more authoritative than they actually are. However, if you see someone selling a government-backed consolidation loan, they are probably trying to just mislead you.
Myth 3: Debt consolidation is bad for your credit score
Although this is a myth, there is a grain of truth here. Initially, when you take out a debt consolidation loan, this may harm your credit score as you’re using more of your credit utilization ratio.
However, assuming you make the payments on the loan, your credit score should start improving. Here’s why:
- You close accounts with your existing lenders – paying off your debts
- You start reducing your credit utilization ratio
- By paying off your current creditors, and making payments on time to the loan provider, you’ll start building a good repayment history.
Therefore, a consolidation loan can ultimately be good for your credit score.
Myth 4: Debt consolidation is very time consuming
We’ll admit that closing accounts with all your current lenders could take a while. However, once that’s done, a consolidation loan should actually free up your time. After all, with only one creditor to manage, one payment to make, and one interest rate to monitor, you should find your finances much easier to manage.
This isn’t even factoring in no longer having to deal with phone calls from multiple lenders.
Myth 5: Debt consolidation isn’t an option for those with bad credit
It’s possible for those with bad credit to feel like the financial world is closed to them. Typically, lenders will see these peoples’ credit history and deny a loan more-or-less on the spot. However, finding debt consolidation loans for bad credit can actually be relatively straightforward.
Perhaps it’s because you’re largely transferring credit – or it could be because applicants want to get on top of their debts. Regardless, you shouldn’t be initially refused for a consolidation loan just because you’ve got poor credit.
This article was provided by Tom Chapman, content manager at Consolidation Express. A UK-based consolidation loan broker, the company – and its advisors – have a wealth of knowledge when it comes to this debt solution.