If taking advantage of debt consolidation is something you are considering, you may have some preconceived ideas about the process and what it can accomplish. But to be successful, it is important to know what this form of managing debt can do for you as well as what it can't. Can you separate debt consolidation fact from fiction?
Myth: The same as debt settlement
Debt consolidation and debt settlement are two completely different concepts. Debt consolidation features the consolidation of your debt into one low-interest-rate loan while settlement involves paying back less than the full amount of what you owe. Because some of your debt is forgiven with debt settlement, the fact that you received a settlement is recorded on your credit report as a negative. Debt consolidation, on the other hand, does not affect your credit standing.
Myth: Saves you money
Debt consolidation doesn't save you money in terms of what you owe because your bills aren't forgiven. You may, however, indirectly save money if the interest rate is lower and you are no longer forking out late charges, if that has been a problem in the past.
Myth: Always a better option than bankruptcy
While debt consolidation is a good move for many people, for certain individuals in desperate need of financial relief, bankruptcy is often the best option. Be wary of companies that offer debt consolidation without also ruling out bankruptcy.
Myth: Delays you from getting out of debt
Consolidating your debt into one big payment might suggest that it will take more time to pay off the debt than if you had continued making several smaller monthly payments. But often, because of the reduction in interest, the opposite is true. You actually can end up paying off more of your debt each month than you did when you had several loans.
Debt consolidation has helped many people get a handle on their finances. As you begin to stabilize your financial situation, being better informed about how various debt-reduction methods work can help you make the decision that is best for you.
About the Author:
Julie Bawden-Davis is a Southern-California-based writer specializing in personal finance and insurance. Since 1983, her work has appeared in a wide variety of publications, including Family Circle, Ladies' Home Journal, Parenting, Entrepreneur and The Los Angeles Times.