Debt consolidation does not escape! Indeed, this mechanism of financial recovery is the target of many falsehoods and that is why we demystify, for you, the 10 most common myths about the consolidation of debts. You will see that it has nothing of the incredible stories that we tried to make you swallow, be assured! You may even see an opportunity to put your stuff back in order!
First of all, what is debt consolidation?
Before demystifying the enigmatic debt consolidation, an explanation is needed for those who are not familiar with its operation. First, it is a loan from a financial institution for the purpose of paying all of your debts to your creditors. The bank will pay the creditors for you, and in this way you will only have one person to repay, the bank.
This option has the undeniable advantage of simplifying portfolio management and avoiding paying many late bills, which, of course, is not optimal for maintaining a good credit rating. In addition, debt consolidation can also benefit from an interest rate that is generally lower than that imposed by creditors to whom you owe money. It also allows you to spread payments over several months so that you can pay the monthly payment without any problem, taking into account your financial situation.
Now that we’ve laid out the basics and some facts about debt consolidation, let’s tackle the biggest myths surrounding this method of repayment!
The negative impact on the credit rating
Let’s start with a myth that certainly worries more than one: the impact on the credit rating. As soon as we talk about debt, we are afraid of seeing our credit rating plummet, but know that consolidating your debts will not adversely affect your long-term credit rating, on the contrary!
The consolidation loan has the same impact on your credit report as any other loan. The advantage is that with this loan, you’ll be able to pay your bills each month at a much lower interest rate than the credit card companies charge. No longer falling behind on your monthly payments will positively impact your long-term credit rating!
Consolidation as a last resort
A rumor seems to be spreading that debt consolidation is akin to bankruptcy and is on an equal footing. Know that it is not so! Consolidation is not an option of last resort like bankruptcy to settle your debts, far from it! It’s actually a way to take the lead on your finances and avoid seeing the debts pile up.
There is no point in being on the run to approach your bank with a request for debt consolidation. This mechanism applies regardless of how much you owe. As previously mentioned, consolidation also has the advantage of reducing your interest rate and consolidating your payments into one payment.
I do not have access to debt consolidation if I do not have a house
Owning a home, it has many benefits, but it is not necessary to obtain a debt consolidation loan. Banks do not require you to own a house to give you a loan. Financial institutions rely instead on factors such as your payment history, your credit history and your annual income to make their decision.
However, it is certain that owning a home or holding a mortgage can give you access to lower interest rates. Such a situation may have an impact on the amount the bank has been given for your debt consolidation, but remember that obtaining such a loan does not depend on your ownership status.
So even if you do not have a home yet, debt consolidation is still an effective option to settle your debts!
There is no difference between consolidation and debt settlement
Think again, these two options differ on many levels! In the case of debt consolidation, you borrow money from the bank in order to pay your creditors their due, whereas in the case of debt settlement, you try to find a middle ground with the latter in order to reduce the amount to be repaid.
These are two completely different repayment methods. Debt settlement often requires the intervention of experts such as an insolvency lawyer or trustee to convince creditors to surrender part of their claim.
A debt consolidation, on the other hand, does not have the effect of reducing your debt. The loan obtained from the bank is used to pay the total amount due, unlike the reduction that can be negotiated in a settlement. In addition, a debt settlement leaves traces that credit companies will see, which can affect your access to credit or the conditions that will accompany your loans in the future.
It is only accessible to people who have bad credit
In many cases, it is the opposite case! Indeed, many people think that only people buried in debt are eligible for remedies such as debt consolidation and that the band must have a bad credit rating. This is not how the system works. Although most people who use debt consolidation are in a precarious financial situation, the banks still require a certain standard of credit rating to grant the loan.
Indeed, as it is a loan to pay your debts, financial institutions want to ensure that their money will be refunded. That’s why many of them require a good credit record. Banks also consider some factors other than credit history to make their decision:
-Your annual income and the stability of your job
-Your payment history to check your ability to repay the money lent to you
-Your credit rating
Consolidate debts is comparable to bankruptcy
This myth is far from the account! The consequences of bankruptcy are much more serious than those of debt consolidation. By declaring bankruptcy, you are released from your debts with respect to your creditors. Your seizable property will be turned over to an insolvent trustee who will liquidate it to pay your creditors.
Bankruptcy inevitably leads to the suspension of the actions taken against you by your creditors such as legal proceedings. In addition, your debts will disappear at the time of your release. The reality differs for the consolidation of debts, because the loan contracted with the bank serves precisely to repay the entirety of the debts due to the creditors.
If the effects of each differ, the consequences are not the same either! In fact, your credit rating will automatically fall to the lowest possible threshold, you will no longer have the right to have a credit card and your access to the loan will also be amputated. In addition, the bankruptcy will be posted to your credit report for a period of 6 years if it is your first and 14 years for the next.
The interest rate is not so advantageous
One of the main benefits of consolidating your debts is to stop paying the staggering interest that comes with credit card debt. Indeed, interest on some credit cards may be around 20%, while interest on a consolidation loan is rather around 12% subject to your personal financial situation.
Also, the repayment of this loan will be done monthly for a maximum of 5 years, which makes the payments are spaced out in time to allow a greater financial freedom and ends of months less stressful.
Banks always demand an endorser
Unfortunately, this myth is not wholly fantasy, because many banks reserve the right to require an endorser to come and guarantee the payment of the loan you have contracted. It is however possible to obtain a debt consolidation loan without endorser. In fact, it depends mainly on the quality of your credit report and the amount of debt you are seeking to repay. Among other things, the bank will require an endorser if you are perceived as an at-risk debtor and the bank deems it necessary to guarantee its payment.
This is all the more important to consider since endorsers are often family members or friends who are willing to help you in your time of need. In addition, your personal bankruptcy or consumer proposal does not release the person who is guarantor for you. Indeed, in your bankruptcy, your creditors will turn to the endorser to demand the payment of your debt for you!
Consolidation does not accelerate debt repayment
This is a myth that must be brought to light! It is undeniable that debt consolidation speeds up the debt repayment process for most people. Indeed, by getting rid of the staggering interests that accompany credit card delays, you put a tourniquet to stop the bleeding and regain control of the situation.
It is therefore by controlling the interest rate and providing for a monthly payment that you are able to respect that the repayment of debts is faster. How consolidation has more and more advantages!
There is no alternative in case of refusal
It must be admitted that not everyone will be accepted by the bank to obtain a debt consolidation loan. Although this avenue is promising, do not believe that such a refusal inevitably leads to bankruptcy, far from it! There are several alternatives, such as the consumer proposal!
Are you ready to go from myth to reality?
Now that debt consolidation has no more secrets for you and you’ve mastered the art of recognizing the truth in a sea of lies, you may want to consolidate your debts to restore your financial health. of yesteryear?
As you may have noticed, consolidation is an effective financial tool that meets the needs of many people who want to improve their financial situation. Above all, it is an interesting alternative to avoid bankruptcy or simply regain control of your portfolio.