Debt Consolidation Loan Truths You Need To Understand

Debt Consolidation Loan Truths You Need To UnderstandDebt consolidation has been helping a lot of consumers find the financial relief they needed. However, as helpful as it may be, there are still a lot of people who have misconceptions about the program. On top of this, there are misconceptions that also seems to persist when people start to talk about consolidating their debts.

There are a lot of reason to consolidate debt but you might be held back by misinformation. At times, this lack of information can land you in trouble. This is because there are scrupulous entities out there who are looking to earn a quick buck over your misguided actions. They can easily temp with you with lofty yet empty promises. In the end, this can lead to even bigger financial problems than the one you began with.

However, there is no denying how a debt consolidation is a great tool in helping you manage your payments. Especially as Forbes.com shares that the national public debt is now at around $19 trillion dollars. This is a large amount that you and your children and their children might have to inherit if you are not proactive with payments.

One of the challenges consumer faces is how the economy is driven by your buying behavior. The more you purchase, the better the economy is. The more it can give you better financial options in the future. This, in turn, can cause that cycle of purchase-payment and debt somewhere in the middle. This is where debt consolidation can come in to help.

Here are a few things you can read up on to help you understand some truths about the program. This can help you manage expectations and help you appreciate the program better.

You are still in debt

When you go into a debt consolidation loan, you might think that your financial obligations are now all gone. This is because your credit cards are all paid up and have zero balances on them. Your car loan might even be paid out as well. That payday loan is now all paid up as well. You could fall into a false sense of financial freedom.

This is a common initial feeling for consumers who choose to consolidate their debts. What you need to understand is that you still owe the same amount of money. The only difference is that another lender holds the loan. You paid for all the other loan with one big debt. Think of it as transferring contents from multiple containers into one big basket. Your financial responsibility does not disappear with debt consolidation. You will still owe the same amount just with a different lender.

Your interest rate can simply average out

The interest rate is one factor a lot of people might be confused about when exploring debt consolidation. This is because you are combining several different rates into one. There are a lot of factors to consider when you look into merging your rate. What you need to understand is that it can simply average out.

This is because if you have are consolidating loans with an 8%, 10%, and a 12% rate, you might end up with a 10% interest on the new loan. You get to lower down your highest rate but your lowest one also increases by the same number. This is one possibility but your interest rate can also go down with the help of your credit score.

One common financial mistakes of young people is letting their score slide down. If you are going into debt consolidation, you would benefit from an improved credit score. It has to be better compared from the first time you took out the loans. With this, you are seen as low-risk by your lender and could qualify for lower interest rates.

Here is a short video to help you understand how a lower rate can help you lower p monthly payments:

You run the risk of running up on debt again

One of the things people often say with debt consolidation is that you are treating the symptom and not the cause. Just like when you get sick, you are drinking something for the fever but not really treating the reason why you have a fever in the first place. This has some merit but you need to remember that it makes life a little less complicated.

One thing you need to be on guard against is running up on debt again immediately after consolidating your debts. This happens when you start adding more debt or charging new items on your card. This can put unnecessary stress on your funds because you are still paying for your consolidate loans and you add new ones. You need to have self-control so you do not negate the advantages of debt consolidation. Fortune.com shares that credit card debt is expected to go over $1 trillion in 2017 but be in control and manage your spending wisely.

Payments can be lower

One of the things, why you want to consolidate your debts, is to have a lower monthly payment. This is most useful when your budget is starting to stretch to cover your financial obligations. As previously mentioned, a lower and improved credit score can lead to lower payments. This can help you save money otherwise paid to cover a high-interest rate.

The program can also help you lower down payment if you choose to stretch the payment timeframe to a longer one. There is no question that too much debt can ruin your life which makes it all the more important to lower down your payment. You just have to carefully weigh this option and see if it falls into your long term goals.

You can end up paying more

One downside of stretching your payments over a longer period of time is that you could end up paying more over the course of time. The monthly payment amount could be small but prolonging the repayment window ends up to a bigger amount when everything is paid out. Be sure to factor this in when you choose to stretch your payment for monthly convenience.

You can refinance a debt consolidation loan

As you combine your loans under one account, it is best to see it through until the end. However, there are times when your priorities and financial situations change over time. With this, you might find that you can make higher payments or need to further lower down that payment amount. You might also have improved credit score and qualify for an even better interest rate. With all these changes, you can explore refinancing your debt consolidation loan.

The important thing is that you undertake this change to improve your finances. Refinance when you need to not because you just want to. If it will help you have a better chance of managing your finances then you should consider refinancing an existing consolidated debt loan.

Debt consolidation is a great way to help you manage your payments. It can even provide that lower payments you need to fit your budget. If you are having doubts undertaking it on your own, there are legitimate debt consolidation companies out there ready to lend a hand. You just need to conduct due diligence and choose the ones that have your best interest in mind.