Debt is something that can completely destroy your financial status especially if the debt has a high-interest rate. The best way to get out of a debt trap is by consolidating your debts into a single debt.
However, before you go ahead and approach a debt consolidation company, there are some facts that you need to know about debt consolidation.
Debt Consolidation Loans and Debt Consolidation Programs are not the same
There are debt consolidation loans and debt consolidation programs. The former is a different loan that you can avail to settle all your existing loans in one single go and the later is more like a payment schedule that helps you manage your loan repayments timely.
Debt Consolidation Companies can use tactics that can hurt your credit score
Debt consolidation companies may use tactics such as holding payments to the original lender to increase their profits forcing the original lender to settle for a very low-interest rate to get the principal amount back. At times, you may not be even aware of such tactics and it will definitely hurt your credit score really bad.
Not all Debt Consolidation companies are non-profit
Yes, there are non-profit debt consolidation companies out there and these companies most likely will not charge anything for the debt consolidation service that they offer you. However, there are profit-oriented companies as well that will surely charge some fee for the service that they provide you. While choosing a debt consolidation company, the primary concern should not be whether you have to pay a fee or not but the service they offer.
Once you choose debt consolidation, you cannot acquire more debts
People choose debt consolidation only when the debts that they already have goes over the roof and it becomes quite hard to repay the existing debt. Therefore, once you choose debt consolidation, you cannot acquire any more debts from the existing lender and you will also have to close the account you have once the debt is paid back completely.
Not all debts can be consolidated together
Not all debts can be consolidated into a single debt consolidation program. For example, you cannot combine a federal loan and a private loan together. Federal loans have to be consolidated separately and private loans have to be consolidated separately.
Debt consolidation can lower your interest rate, but beware of too low-interest rates
Consolidating your debts will reduce the overall interest you have to pay to the various lenders you owe to. However, debt consolidation companies may advertise a very low-interest rate to lure you to their company. Beware of such claims and be sure to compare with the other debt consolidation companies in your area to find if there are some false claims.
Also, if you have an average or below credit score, then even after debt consolidation, your interest rate will remain higher than the interest rate paid by borrowers with good or excellent credit score.
Debt consolidation can help improve your credit score
If you miss your repayments to the lender, then it surely will affect your credit score. Debt consolidation is one way to rebuild your credit score as it will help you repay instalments in time, albeit in small amounts.
Not all debt consolidation companies offer the same benefits
The benefit you have from approaching a debt consolidation company depends on the terms that the company have with your lender. Aged debt consolidation companies have better ties with lenders and can offer less interest or even better deals.
Now that you know more about debt consolidation, it will definitely help you find an appropriate debt consolidation company.
Arpita Arya is a digital marketer and blogger. She has been working in the industry for several years and contributed her experience to various brands. She has extensive experience in content writing, product marketing, and improving website’s traffic through cross-promotion.