If you are a cash-strapped person facing mounting debt, you
may have heard the term debt consolidation thrown around.
You may have even considered it. But what you don't know is
that you might not understand it.
Of all the financial plans available for people dealing
with overwhelming debt, debt consolidation is probably the
most valuable and the least understood. In fact, you may
already believe some of these common myths about debt
consolidation. Find out the truth!
Myth #1 Debt consolidation is the same or similar to debt
management, debt settlement, and bankruptcy.
Truth Debt consolidation is nothing like those other
programs. In fact, it's not really a program (you can do it
yourself if you want to) but more of a strategy.
In debt consolidation, you lump all of your debts together
and repackage them. Debt settlement and debt management
typically involve dealing with a company or counselor and
the object is to reduce the amount you owe. Bankruptcy is a
legal proceeding that involves a date with a judge.
Myth #2 Debt consolidation reduces your debt.
Truth No, it doesn't. If you owe a total of $80,000 on
several credit cards and loans and you consolidate that
debt, you still owe $80,000.
Debt consolidation does not re-negotiate, settle, write
off, or reduce any of your debt. What possible advantage is
re-organizing your debt like that?
If you have high-interest debts, repackaging them into a
more advantageous large loan reduces your interest. This
means you can either pay less a month or (even better) pay
the same amount but get the debt paid off sooner.
Myth #3 Debt consolidation will hurt my credit score.
Truth Done properly, debt consolidation will not impact
your credit score or credit report negatively. In fact,
debt consolidation may even improve your credit score!
That's because you'll be paying off a bunch of smaller
loans and any time a loan is paid in full, that helps your
credit score.
Myth #4 Debt consolidation requires getting help from an
outside agency or a lawyer.
Truth While there are companies that specialize in debt
consolidation programs, you do not have to use them to
consolidate your debt.
Of course, if you want to consolidate your debt on your
own, you have to know a bit about how to do it and what the
options are. But it can definitely be a do-it-yourself
project for people good with money (or who are willing to
learn enough to get good with money).
Debt consolidation is also not necessarily visible to
outsiders. Your bank, the credit bureau, and other parties
may not even be aware that you have consolidated debt.
Myth #5 Debt consolidation is something for financial
losers and lightweights, not for people who know how to
manage money.
Truth This is the most far-out myth about debt
consolidation. Debt consolidation is a principle that is
used in business and by the super-wealthy all of the time.
It is a way of organizing and structuring your debts in a
way that is most advantageous to you.
Myth #6 Debt consolidation is just robbing Peter to pay
Paul; you're just getting more debt!
Truth Debt consolidation is indeed a way for you to pay off
one debt by getting another debt. But not all debts are
equal.
Let's say you owe $10,000 and it's in a loan that requires
you to pay 22% interest. Now let's say I could go to my
credit union and work out an arrangement to borrow $10,000
at 12% interest. Both debts are for $10,000 but the one at
12% interest is much more favorable to me. I won't have to
pay as much per month or, if I make the biggest payments I
can, I can pay it off sooner.
Myth #7 Debt consolidation requires you to be a homeowner.
Truth There is a grain of truth to this, in that owning a
home definitely offers an advantage to anyone who wants to
consolidate debt. (It doesn't matter if your home is paid
for or not, but you do need some home equity.) However, you
can consolidate debt without owning a home, too.
Myth #8 Debt consolidation will make it harder for me to
get future loans.
Truth In most cases, it is unlikely that anyone but a
forensic accountant could figure out that you consolidated
your debt (unless you go through a debt consolidation
company—that might leave a paper trail).
If you borrow money in one loan and then take out another,
more advantageous loan to pay off the first one, you're
more likely to leave a paper trail of somebody who pays off
debt responsibly. It is more likely to make you a desirable
creditor.
Myth #9 People who consolidate debt just wind up digging
themselves in deeper in debt!
Truth It is absolutely possible to consolidate your debt
and then keep spending and get yourself in a big mess.
That's why you need good information and a plan to pay off
your existing debt, manage your finances now, and start
planning for your financial future.
There is no reason that debt consolidation cannot work to
get you out of debt for good, but you have to have a plan.
Myth #10 Debt consolidation will allow me to write off some
of my debts and it will stop bill collectors from calling.
Truth Let's take these one at a time.
Unlike bankruptcy, debt consolidation will not allow you to
write off any of your debt—not a penny of it.
Whatever you owed as a debt before debt consolidation is
the amount you'll owe after debt consolidation.
The advantage is just that you structure it in a more
favorable loan. You do not get existing debts cancelled or
decreased! Now it's true you can work that out in other
debt management solutions (debt settlement lets you reduce
debt, bankruptcy will let you write some debt off) but they
come at a very high price. Both of these approaches will
have a negative impact on your credit score, will make it
hard for you to get future loans, and stay on your record
for quite a while. Bankruptcy, in particular, is an extreme
solution that involves an actual court proceeding and a
judge who has the authority to make certain decisions about
your financial situation (including forcing you to sell
some items to pay off debts).
Debt consolidation can only stop bill collectors
indirectly. Here's how: let's say you have six debts and
you're getting calls all of the time. If you consolidate
your six debts into one large debt consolidation loan at
more favorable terms, you'll pay off all of those debts.
Bye-bye, bill collectors!
However, if you don't pay off your new debt consolidaiton
loan on time, the bill collectors will start calling again.
----------------------------------------------------
For straight talk about debt consolidation and whether or
not it's right for you, zip over to
http://www.MyDebtConsolidationAnswers.com . To grab a free
report about your personal financial style, visit
http://www.debt-consolidation-diva.com .
No comments:
Post a Comment