Top 10 Debt Consolidation Facts – Is Debt Consolidation Your Way Out?

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Are you struggling with debts from your credit cards, or personal loans and any other uninsured loans? Have you been advised to make up a loan to repay your debt so that you are left with one loan to service? The process of taking up one loan, or putting all your loans together into one box, repaying the debts, then paying back one lender is called debt consolidation.

It is one of the many debt relief and debt management processes offered to persons unable to make timely payments of their loans. By combining these loans, you end up with one loan that charges a lower interest rate and possibly lower monthly repayments. Sounds enticing, right? Unfortunately, this general description or definition leaves out other important facts that can make you non-eligible for debt consolidation. The facts are listed here:

1. Consolidation isn’t a debt off switch button

Contrary to what you may think, debt consolidation doesn’t erase or get off debts in totality. What happens is that it offers a manageable way for you to repay your debt since you are already juggling with various debts. Taking up the loan simply makes the burden easier on you through the months.

As a result, it is highly advisable that you change your spending habits once in debt so as to be free of debts when you finish repaying your loans. This also means that you have to start budgeting to repay your loans monthly while saving up some more little money that will help rebuild your credit score.

2. There are two types of consolidation loans

Debt consolidation made super easy with this distinction. The consolidation loans aren’t one shoe fit all financial and credit management processes. There are two types of loans that you can qualify to get. These are the secured and the unsecured loans.

The secured loan has your business assets as the collateral for the loan if you default. Unsecured loans, on the other hand, aren’t tied to your business assets and they are given depending on your credit history. This means that your business gets this loan if the current financial tumults are temporary and your business projections show that you will get back up in and resolve your financial crisis.

3. A new lender is introduced

When your loans from the old lenders are repaid, it means that you get a new lender in your books. You will have to provide them with all your financial details and books before they can agree to offer you a good debt consolidation plan.

In other cases, the new lender will set up a repayment account where they will be repaying your creditors from. The upside is that your new lender charges lower interest rates.

4. Debt consolidation is different from debt credit counseling

Most financial and credit control institutions note that clients confuse debt consolidation from credit counseling. Credit counseling involves looking at your financials, evaluating your expenses as well as debts, then providing a solution and advice, particularly on budgeting.

Debt consolidation, on the other hand, deals with your debts only and offers better repayment deals for the same. Some credit counseling agencies, however, have debt consolidation programs, which they will advise you take after examining your debt. With this clarity, you can say that the whole debt consolidation made super easy.

5. The not-for-profit confusion

Being in debt and the inability to repay or manage all your debts can be a devastating and overwhelming time. You will most likely look for solutions that are affordable or even free. Non-profit debt consolidation or debt relief agencies will cross your mind.

Non-profit means that you don’t expect to pay any charges or fees and this could attract you to a plan from such an organization. Unfortunately, the not-for-profit part is often a lie and you will have to pay some money. What you should do is to consult the different counseling agencies around to determine the agency with affordable plans.

6. Just stop

Spending is a bad habit that affects about everyone and business. You will always find a classier or a more effective machine and with this, you may decide to take a loan to pay up. However, this shouldn’t be. Before paying for a new asset or a vacation to your partners, consider the real need for that vacation and if it makes sense to have it.

Most credit and debt consolidation firms understand this problem. As a result, you will have to agree to refrain from unnecessary spending while repaying the consolidation loan or even after.

7. Beware of scams

Debt consolidation agencies offering extremely enticing deals, the ones with sales persons who will do anything to get you to sign up for their services, the agencies asking for fees up front, or the agencies asking for a guarantee to sign up against the loans should be avoided. You should always ensure that the debt consolidation plan meets your needs.

8. Differentiate the loans and the programs

While the debt consolidation loan allows you to pay off your debts in their entirety, debt consolidation programs offered by credit counseling agencies are there to restructure your debt.

9. Do not believe everything advertised

The low-interest rate promised may not be appropriate or workable for your business’ current financial situation. In some cases, the advertised interest rate is only available for a limited time and the rates can change at any time.

10. You may end up paying more in the long run

By lowering your interest rate, and spreading the repayment over a longer duration, you will find yourself paying more than what you were paying initially. Some low-interest rates have the principal amount at a constant level and this stretches your repayment periods increasing the amount payable in the end.

In conclusion, these facts, which may be termed consolidation rules by some people have been constituted to keep you safe and for you to know which your best debt repayment loan is. Your personal private student loans will not be consolidated, only the federal student loans. In case you need more clarification, then you may consider talking to your credit counselor.

 

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