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Some Financial Facts about Debt Consolidation that You Must Know

You must be going through a financial crisis because you are neck-deep in ever-mounting debts. When you face overpowering debts, you often take the decision to consolidate your multiple debts by taking out a debt consolidation loan. Many of you are not sure whether to take the final plunge because you are having second thoughts about it. Let us explore a few facts about this so that you could think clearly and make the right choice. In reality, debt consolidation aims to lighten your debt burden and assist you in paying off your existing debts faster and easier.

As per https://www.forbes.com, “Debt consolidation is the conversion of high-rate debt into lower-rate debt in order to reduce total interest costs. Homeowners with large amounts of credit card debt who have unused borrowing power on their home have a consolidation option.” A host of online lenders have come up who are revolutionizing the way people borrow money. We know that most lending institutions offer a 100 percent online loan application facility that does not necessitate branch visits. You could successfully get the loan money into your bank account the next working day and even sign the loan agreement entirely online. With all these merits, it is crucial for you to understand exactly how debt-consolidation actually works and understand some hard facts about the process.

What Does Debt Consolidation Entail?

Debt-consolidation is actually rolling your multiple unsecured debts including credit card debts, payday loans, medical bills, etc. into a single loan with the lower interest rate, and one single repayment every month.

There are Different Debt Consolidation Programs

Debt consolidation programs are known to vary hugely between different nonprofits and financial institutions. You need to be careful while choosing a consolidation agency. Do not choose a debt company who are trying to rush the entire process and are unreasonably hasty. You need to stay away from scammers. So do thorough online research and go through meticulously both debt consolidation and debt settlement ratings online before making the right choice. Such programs usually vary so you need to ask relevant questions that may help you choose the right plan for your unique requirements.

Huge Difference Exists between Debt Consolidation Programs & Loans

There is a massive difference between both. A debt consolidation loan actually is supposed to be an additional loan that would allow you to effectively pay off your entire outstanding debt. Secured debt consolidation loans would be using your property or house as collateral. In this context, you should understand that a such program would restructure your debt and act as just a bill paying service which would be negotiating interest rates with agencies on your behalf.

Debt Consolidation Does Not Guarantee Low-Interest Rate

The interest rate for your consolidation loan would be set as per the wishes of your creditor or lender depending primarily on your credit score and your past loan payment behavior. Moreover, even if you are eligible for a low-interest debt consolidation loan, there are absolutely no guarantees that the interest rate would remain low. However, honestly speaking, your loan interest rate is certainly not a problem but your spending habits and lifestyle are the big culprits.

Debt Consolidation Loan’s Lower Interest Rates May Change

This precisely applies to consolidation using credit card ‘balance transfers’. Usually, credit cards offer an enticing introductory low-interest rate as a promotion. This incredibly low rate would be applicable only for a stipulated period. Once the specified period is over, the interest rate is going to bounce back to the normal higher interest rates.

Debt Consolidation is Time-Consuming

Debt consolidation implies that you would remain in debt for a relatively long period of time. In a majority of such cases, you are thrilled to obtain a debt consolidation loan at an impressively lower interest rate. You need to realize that it is possible to get such a lower interest loan simply because the loan payment term has been extended. However, extended terms could mean extended payments. Your intention must mandatorily be to eliminate your debts fastest possible.

Debt Consolidation Is Not Necessarily Mean 100% Debt Elimination

You seem to be simply restructuring your debt and not eliminating it. You are simply taking out a fresh new bigger loan to pay off your multiple debts. But essentially, there is a loan to be repaid. You need to make a single repayment every month.

Debt Consolidation Cannot Change Your Money-Related Behavior

Debt consolidation is often not able to resolve your financial crisis because even after consolidating your debts, your debts do not cease. You are constantly growing your debt back. The reason is primarily that you do not follow clever money habits for building wealth and staying out of debts. Your lifestyle and spending behavior need to be changed with your own sincere efforts or with the help of counselors who would guide you about ways to stay out of debt and generate some wealth. Consolidation cannot magically eliminate your splurging habits. You need to be conscious about the root cause of your financial trouble and rectify it once the problem has been identified.

Debt Consolidation Agencies Are Not Necessarily Non-Profit

Many people harbor the misconception that all debt relief firms are non-profit in nature. It is true according to the CFPB that most of these organizations are indeed non-profit, but there are no restrictions stopping for-profit firms from entering the business. Many service providers do charge sizable fees for their work, in the form of upfront fees or administrative fees. If this is a consideration for you, you should get clarification beforehand. That said, sometimes the choice isn’t as simple. You need to go for the agency that will be best for you, that is most willing to understand your plight and go out of the way to help you out. Do your research and make the best choice you can.

Conclusion

There is a lot of moving parts and variables when it comes to something like debt consolidation. You need to be aware of them and what implications they have before you jump in. There are a number of resources freely available online, as well as several experts who would be willing to provide advice and assistance for specific questions. A good counselor or agency will help you get past the technicalities and identify the best possible plan for you to be debt-free as soon as possible.