Debt consolidation refers to the act of getting a new loan to pay back previous liabilities and other debts. In debt consolidation, different unsecured loans are consolidated into one single amount of loan with favorable payment terms. Favorable terms may include a lower interest rate on loan or lower monthly fractions of payment.
There are many myths and misconceptions about debt consolidation cost and payment. We are here to burst the bubble of such myths and to tell you how debt consolidation actually works.
- You will get a lower interest rate
You may get a lower interest rate on your loan for debt consolidation if you have a positive credit score rating. But your total interest plus principal amount increases if you increase the loan payment period. It is simple that you are paying a lower interest rates but for a longer period that increases the overall interest payment on loan.
With the decrease in interest rate and monthly payment, you may benefit by increasing your cash flow but in the end, you would pay more interest to your principal.
- It reduces your debt burden
You can never mitigate or reduce the debt that you have taken with debt consolidation whether they are in the form of credit card or student loan etc. your different kind of loan and liabilities are combined into one and you make payment against the total amount that is based on the new interest rate and new monthly payment.
- Debt Consolidation is very expensive
The interest rate on debt consolidation depends on the lender and it is mostly lower than the credit card interest rate. Most lenders charge as low as 6% for debt consolidation loans for the people with the best credit score rating.
Most of the lenders do not charge extra fees for debt consolidation loans and your only cost is the interest rate on the principal amount. Some lenders may charge a one-time fee for starting the loan or charge some fine for late payments. APR (Annual payment rate) shows the annual rate with lender’s fees included in it so it became easy for you to compare the rate across different lenders.
- It negatively affects your credit score
Debt consolidation usually decreases a few points from your credit score rating. In addition to that, the consolidation will go in your favor if you pay back your debt on time. Paying off consolidation debt on time has a 35% rating in credit score.
- The process is time-consuming
Some people think that debt consolidation took time and the process is quite lengthy. But in reality, the process is quite easy. Some lenders have online portals through which you can upload the necessary documents like pay slips, bank statements, driver licenses or state ID cards, etc. The process would take hardly more than a week.
In less than a week, you would have your debt consolidated and it would become a lot easier for you to pay your monthly liabilities and debt on time.