4 Myths to Stop Believing About Consolidating Your Debts
7th March 2023
When money’s tight and multiple different debts start piling up around you, it can make it hard to think clearly. The idea of debt consolidation can feel intimidating, especially if you’ve heard all the myths.
What is debt consolidation? Debt consolidation is a process that’s often pointed towards when it comes to managing debt, but there are a few myths and misconceptions around the topic that it’s worth debunking.
By busting these popular myths, we hope you’ll have a better understanding of whether debt consolidation is the right option for you.
Myth #1: Debt Consolidation Wipes Out Your Overall Debt
Right from the start, this is the most important myth to clear up. Consolidating your debt doesn’t reduce the amount of overall debt you have, or wipe it out – that’s debt settlement. Debt consolidation simply collates all your individual debts into one, singular repayment, typically in the form of a debt consolidation loan.
Where the myth may arise is that with multiple loans and debts to pay back, you’re more likely to forget about one and incur additional interest/penalty charges as a result. With just one consolidated debt loan to pay back, that’s less likely. The amount of interest you will pay back overall will depend on the interest rate and the term of your loan.
By putting your debts in to one loan you may be able to get a better interest rate than you can on a lot of smaller loans, and you may be able to choose a new term. It is worth remembering that the longer the term of the loan the more interest you will pay back.
Whilst it might not reduce the amount of debt you owe, however, there’s no doubt that consolidating all of your debts into one singular loan can help make your debt easier to manage and less stressful.
The Whack-a-Mole Analogy…
A good way to think of debt consolidation is to imagine a game of Whack-a-Mole. When you have multiple debts and loans to manage, they’re constantly springing up around you, and it can be hard to keep up with them.
As soon as you think you’re on top of one, another one pops up that you remember, and the whole process becomes stressful and hard to keep up with. What debt consolidation does is remove all of the moles except one, which springs up in the same place every time, with no unexpected surprises. An easier target to hit.
Myth #2: Debt Consolidation Will Land You in More Debt
This one is a myth as long as you ensure it stays a myth - it’s down to you. When you replace your credit cards and loans with a single debt consolidation loan, you are not reducing the total amount you owe.
If you then start using those credit cards again, then you’ll be piling additional debt on top of your debt consolidation loan, rendering taking out the latter pointless in the first place. So, our top tip would be to keep those credit cards stored away and out of reach so that you’re not tempted to start using them again once you’ve taken out that consolidation loan.
Myth #3: There’s Only One Type of Debt Consolidation Loan
Because debt consolidation loans are taking multiple debts and collating them into one, it can be easy to think that, correspondingly, there’s only one type of debt consolidation loan and that they’re all the same. That isn’t the case, however. Broadly speaking, there are two main types of debt consolidation loan: secured and unsecured.
Secured debt consolidation loans require you to offer up a personal asset to act as collateral in the event that you don’t pay back your loan. This asset is typically the loanee’s property, however, it can also be another high-value item like a vehicle. It all depends on the amount being loaned.
Unsecured debt consolidation loans, by contrast, don’t require you to offer any assets, but as a result, your credit score will have much more of an impact on whether you’re accepted for a loan or not. Sometimes, guarantors can be used in place of a high-value asset as security.
Then, of course, the loans themselves will vary from lender to lender in terms of the amount offered, the interest rates provided and the repayment period stipulated.
Myth #4: Debt Consolidation is a Long, Drawn-Out Process
Provided that you meet the particular lender’s criteria, and depending on the type of loan you decide to apply for, there’s no reason why you shouldn’t be able to take out a debt consolidation loan in just a few days
So, there you have it, 4 myths about debt consolidation debunked and hopefully made to sound less intimidating.
Debt consolidation can be an option for those looking to get on top of their debts, but it’s not a miracle solution. Make sure you do your research and thoroughly consider your situation before taking out a debt consolidation loan.