Common Myths About Consolidation Loans Debunked
The principle behind debt consolidation is a simple one. You have a series of debts which you’re struggling to manage, and so you take out another debt to pay all of these off. After doing this, you’re able to make payments in one place. It’s a way to manage financial stress, and, in many cases, to lower the amount you pay overall.
Despite the merits of this form of finance, its reputation has been blighted over the years by a handful of persistent myths. Let’s take a look at a few of them.
Myth: Consolidation Loans Are Only for People in Severe Debt
Perhaps for understandable reasons, consolidation loans are often viewed as an emergency measure, reserved for people whose financial affairs are spiralling out of control. But the benefits aren’t just for people who are struggling – they might also be helpful to an everyday person who wants to simplify their financial life.
Myth: Consolidation Loans Will Ruin Your Credit Score
Your credit score is mostly a product of the amount you’re repaying, and the proportion of available credit you’re using. While your credit history might be impacted in the short term by an extra loan, in most cases it will recover quickly. Since you probably won’t be in the market for more credit immediately after you’ve taken the loan out, this is unlikely to be a problem. In fact, since the consolidation loan might help you pay down your debts faster, the net effect on your finances might actually be positive.
Myth: All Consolidation Loans Are the Same
While all consolidation loans follow roughly the same principles, there are distinct differences between them that are worth dwelling on. The most salient distinction is to be made between secured and unsecured loans. The former will offer greater flexibility, and more favourable terms – but you’ll need to put something up as collateral.
Not all debt consolidation loans are the same, and understanding the differences between secured and unsecured options is crucial to choosing the right one for your financial situation.
Myth: You Can’t Get a Consolidation Loan with Bad Credit
A poor credit history probably will not disqualify you from getting a consolidation loan. However, you might have to pay more in interest, because the lender will judge that you represent a greater risk. In some cases, you might end up paying more interest than you would if you stuck with your existing debts. Before making the switch, therefore, it’s worth sitting down and working out exactly how much it’s going to cost.
