Debt consolidation-myth and reality

Debt consolidation can indeed be an effective solution for people with revolving debt. But you should know that debt consolidation is perhaps the least understood of all debt relief programs. So it is very important for you to learn the right facts before opting for this option. Let’s have a look at a few misconceptions related to debt consolidation:

1) Myth: Debt consolidation and debt settlement is the same thing

Reality:

This is absolutely wrong. Debt consolidation is basically a strategic approach, which involves taking a long term loan to eliminate all existing debts. This means that you will have an opportunity to pay back your debt over a longer period of time. Naturally, the monthly installments will get lowered.

Debt settlement, on the other hand, is an entirely different proposition. It involves a reduction in the principal amount through negotiation with creditors.

2) Myth: Debt consolidation is a debt reduction process

Reality:

Debt consolidation does not reduce your debt. On the contrary, you might end up paying more over the years. With debt consolidation, you need to pay interests for a long period of time (usually between 20-30 years). So the lower monthly payments come in lieu of more interest payments in the long run. You should clearly understand that debt consolidation does not involve any debt reduction or write-offs or debt negotiation.

3) Myth: Debt consolidation results in a blemished credit score

Reality:

Your credit score drops when you enroll in debt reduction programs like bankruptcy or debt settlement. With debt consolidation, you pay back your entire debt. Therefore, your credit score does not take a hit. In fact, if you make regular payments to pay off the consolidation loan, your credit score will certainly increase.

4) Myth: I need to be a homeowner to consolidate debts

 Reality:

 This is one tricky statement. Technically, anyone can consolidate his debt. But most consumers who try to consolidate have poor credit score due to several missed payments. Therefore, they do not qualify for unsecured consolidation loans. They need to back consolidation loan with collateral (usually their home). So it is important to be a homeowner if you do not have decent credit rating.

Debt consolidation can be a decent option for people with credit card debt. But make sure that you understand the program before making a decision.