Debt Consolidation Always Saves You Money: Myth or Fact
Most of us have been there at one point or another: low on cash, bills due, rent due, and a pile of credit card balances. These days it can be incredibly hard to stay above water with everything that’s going on. If a lot of your debt is in the high-interest category, or if you’ve just gotten tired of being stuck in the cycle of debt, you may have considered getting a debt consolidation loan to help get you out of the financial hole.
But maybe you, like countless others, wonder if debt consolidation is the way to go and if it can help you get into better financial shape. These are valid concerns. As with many other things, some debt consolidation companies are there to help people and some are there to make money by making wild promises that they cannot keep. Let’s separate debt consolidation fact from fiction.
What Is Debt Consolidation?
Debt consolidation, simply put, is combining several or even many debts, into one sum and one corresponding monthly payment. There are several ways to go about consolidating your debt, with some being more effective than others. The important thing to remember is that consolidation does not mean cancellation, and you will still pay your debts off eventually.
How Does Consolidation Work?
The most common type of debt consolidation is where you work with a consolidation company. They evaluate your debt and work with your lenders to get payoff settlement agreements. Then they check your debt-to-income ratio and have you apply for the consolidation loan.
If approved, they issue a loan in your name (generally at a far lower interest rate than that of your current debts) and use it to pay off the negotiated settlement amounts for your debts. At this point, you only need to communicate with and make monthly payments to one company.
Will Debt Consolidation Affect My Credit Score?
While the process itself does not have any direct effect on your score, there are numerous secondary effects that you will see. When you apply for a debt consolidation loan, you may see a slight dip in your credit score. Once you enter into consolidation, though, and make payments on time, your credit score will often rise quickly. The accounts that generated the debts will also be listed as paid or settled, allowing those credit report blemishes to begin healing.
When Can Debt Consolidation Help?
Debt consolidation may be helpful for your situation, if:
- There is no cost for the consolidation services or a very minimal one
- You can get a fixed interest rate
- Your new interest rate is lower than your current average interest rate
- The repayment period would be the same or shorter than paying off the debts individually
The Final Word: Will Debt Consolidation Save Me Money?
Unfortunately, there is no one single answer to this since it will depend so highly on your situation, down to the amount of debt you have and even who the lenders are. In most cases, the best thing to do will be to gather all of your debt and payment information, including interest rates, and contact a debt consolidation company to see if they can offer an improvement. If you can secure a lower interest rate for little to no fees, debt consolidation can save you money.
