When you take a out a number of loans, managing timely repayments can be an arduous task. A debt consolidation loan is a practical way to merge all your scattered loans into a single one. But the myths surrounding debt consolidation causes confusion. We’ve debunked 5 of the most common myths to help you make a better decision
A debt consolidation loan is taken when you want to combine all your debt obligations, into one single loan. This way, the money from the new loan is used to pay off the existing debt. And your new debt consolidation loan will have a different tenure and interest rate, as agreed upon by you and your lender. Generally, getting a debt consolidation by merging all loans into one, would allow you to lower your monthly payments.
However, as practical as this sounds, people have had a lot of preconceived notions about debt consolidation. To help you get a better insight into this, we’ve analysed and debunked 5 myths surrounding debt consolidation loans.
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Representative Example: Borrowing £3000 over 36 months with a representative APR of 39.9% (variable),the amount payable would be £134.21 a month,with a total cost of credit of £1831.56 and a total amount payable of £4831.56.
Myth 1: Debt consolidation loans cost a fortune
- A lot of people think about whether they should borrow money to pay off their debt. The cost of a loan is majorly determined by the interest that you have to pay on it. Just like all other loans, the interest rate levied on your loan will largely depend on your lender. However, debt consolidation loans may cost you less than most credit cards.
- A number of lenders would lend you a debt consolidation loan and charge no extra fee. While there may be some who would charge a one-time loan origination fee to cover the charges of processing your loan application. APRs usually include this origination fee, so if you compare loans beforehand, you can choose the best option.
- LoanTube is a one-stop-shop for comparing loans from multiple lenders based on Real Interest Rates. All you need to do is fill a single, comprehensive application so that you can choose an ideal loan offer.
Myth 2: Debt consolidation affects the credit score
- Most loans require a thorough credit check before handing out the money to the borrower. In case of debt consolidation loans, these checks are often more ‘rigorous’ than other loans. This may slightly affect your credit score, but perhaps just by a few points.
- Although, consolidating your debt may actually help boost your credit score. Only if you manage the debt and repayments in a timely fashion. This is because timely repayments account for a major part in your credit score.
- Thus, a little dent on your credit score may all be worth if you’re able to keep on top of your repayments and manage your debt more efficiently.
Myth 3: Debt consolidation loans will ‘reduce’ your repayment amount
- A debt consolidation loan will help you pay off your existing debts so that you ultimately owe money towards a single loan. However, contrary to beliefs, debt consolidation does not reduce or waive off your loan repayments. It just merges your debts into a single one, to ease your debt management. All you need to do now is pay against this balance on a monthly basis (or as agreed upon by you and your lender) until the debt is over.
- Debt consolidation is different from debt settlement, wherein you hire a debt settlement firm to represent you, to ask your lenders to reduce the money you owe them. Debt settlement can be a risky business as it can hugely impact your credit score.
Myth 4: You’re guaranteed to save on interest
- Having a strong credit score and a solid credit history might get you a deal where the interest rate on your debt consolidation loan is lower than all of your loans combined. However, if you were to increase your repayment tenure, you might actually end up paying more towards this loan.
- To illustrate this through an example, let’s consider £20,000 in credit card debt at an APR of 15%, and monthly payments of £600, means your total payments would be £25,800, and it would take three and a half years to pay it off.
- If you consolidate to a personal loan with a seven-year repayment term at 10% APR, your new monthly payment is £332, but your total payment increases to £27,890.
- Therefore, this how much you pay or save, depends on your credit score, interest rate and the repayment tenure.
Myth 5: Debt consolidation push you towards more debt
- This is one of the most common myths surrounding debt consolidation loans. Getting into a debt trap depends on how responsibly you spend your money. If you have a strong and robust budgeting system in place, you will end up being more judicious with your spending. Debt relief plans can help simplify and detangle your repayments. But if you don’t work on your spending habits, you may end up debt again.
- So debt consolidation only eases your repayment process to prevent you from falling behind your payments. It does not have a role to play in pushing you towards more debt.
This is when you should consider debt consolidation
- You’re not exhausting all your savings while paying towards the charges and fees
- You are sure about repaying the loan in full
- You improve your spending habits and keep a check on unnecessary direct debits
- You don’t keep taking out loans. This is a debt problem, in which case, talking to a debt advice service should be your first and foremost step.
If you find it hard to resist the temptation of using your credit card, it would be better to seek some professional debt advice. Ceasing your credit card service might be a good idea in that case.
After learning about debt consolidation loans, if you do choose to get one, we suggest that you shop around a little. Compare loans thoroughly to find yourself the best-suited offer. To find yourself a loan that offers you Real APRs, that is, the exact interest that you will owe your lender, visit LoanTube.
