6 Common Misconceptions About Debt Consolidation
When trying to repay multiple loans, whether it’s a credit card or a personal loan, you may find very many options all under the umbrella of debt consolidation. Debt consolidation can be one of the best ways to get your debts under control. Unfortunately, many people do not know what it means to consolidate a loan or to combine a number of other small debt into one huge loan.
Debt consolidation is often used as a financial strategy by people trying to control the credit card debt. However, there are numerous misconceptions associated with debt consolidations which may dissuade you from going for what could be your most effective method of managing your loans. Here are the six common misconceptions you may need to get clear about debt consolidation.
Debt consolidation damages your credit score
This is one of the most common misconceptions in Singapore. The two critical factors that determine your credit score are the credit utilization and payment history. This means that as long as you do not default on repaying the loan, your credit report will be accurately updated without interfering with your credit score.
It is also important to note that your credit score may only slip slightly down due to the new credit opening or closure of other old existing debts. However, if you continue paying the loan promptly, your credit score actually rises. The initial drop should therefore not be a threat, what’s essential is where your credit score lands when the loan has been fully paid.
Debt consolidation only lands you into more debt
Another common myth you might come across is that debt consolidation just makes your situation grow worse, but it does not. Many say it’s like “using fire to quench fire.” An important point to note here is that your debt management plans determine whether you’re capable of repaying a big loan or not. It is straightforward to get the mother loan to wipe out the baby loans, but if you have not made a budget or regulated your spending habits, you may end up having a more significant and more severe debt crisis.
While the whole debt consolidation means gathering all your small debts into one big loan, this only states that you are only owning one bank. It also means that the amount you took may be more than what you’re required to repay on all the other debts. Credit counseling is at this moment needed to ensure that an individual manages to create a budget and practices financial discipline.
Debt consolidation saves you money
Running from one debt to another doesn’t save you any money. In fact, it can cost you more. Remember that debt consolidation does not pay you anything, it only helps you manage your debts by piling them into one common loan at a small interest—not free. Before navigating to the debt consolidation desk, pay utmost attention to the repayment fees, penalties, and interests and factor in to weigh if the venture is prospective or not.
To know whether this is true, calculate the amount you’re paying on all your cards monthly and then check the terms on each loan to know how much it may save you or it might cost you to close those accounts. This way, you will be in a position to decide whether the upfront costs are worth the saving or not. This may not be a myth after all especially for a smart credit holder but as always—it depends on very many factors.
Debt consolidation is a not a genuine method
Many people do not believe in debt consolidation and many terms it as a scam. Well, it pays to do some quality research and get the facts from experts before circumnavigating through the rough paths. The Singapore debt consolidation industry dealt a big blow during the great recession back in 2008, where the predatory lenders had popped up right and left and had taken advantage of people. Many people fell into considerable debts in a short time.
Debt consolidation is a legitimate avenue to pay your debts, although there exist scammers who may be after your money. A credit counseling agency can go a long way towards helping you find the best office that offers legal services. One red flag that should point to a scammer is if the company requests for colossal lump sums of money as upfront payments.
Debt consolidation guarantees you that all your debts will be settled.
Taking a debt consolidation plan does not guarantee you any debt settlement. Whether the idea goes through or not, it all depends on many factors like financial management. Keep in mind that there is no shortcut to loan repayment. It is only the lender that changes, and that means that in one way or another you may want to limit your expenditure to beat the month interests targets.
The debt consolidation only helps you organize your payment method and ease the confusion of various debts that you may be having. Each month, you will be required to pay a certain amount of money, and if you still carry on with your old spending habits, you may find yourself incapable of repaying the loan which will only extend your financial burden.
Debt consolidation is a form of bankruptcy
This misconception mainly comes from the less informed. There is an extensive difference between debt settlement and bankruptcy. Bankruptcy is when one is incapable of paying loans due to various reasons that are legally known by the bank and the court of law— a legal status. When someone is declared bankrupt, he or she may get several restrictions like not leaving the country.
Contrast to bankruptcy, debt settlement, a plan offered by Singapore financial institutions is a method of loan repayment—where all the other debts are combined into one loan at a specific interest rate. Unlike bankruptcy, you are not restricted in any way, and if you are unable to pay, your credit facilities may be shut down or get suspended.
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