If you rank among the millions of people struggling with high credit card balances and other types of debt, don’t let sometimes false or misleading information lead you away from viable solutions. Although some news about debt consolidation loans may seem convincing, those phony narratives remain far removed from the truth. After understanding the following myths about debt consolidation loans, it may be in your best interest to contact Peach State to discuss your financial situation and possible debt consolidation solutions.
1: Debt Consolidation Loans Always Hurt Your Credit
Uncontrolled personal spending, missing monthly payments, and other negative financial habits typically hurt credit scores, not debt consolidation loans. In fact, leveraging an appropriate debt consolidation loan to roll your multiple debts into a single payment with a typically much lower interest rate ranks among the more practical solutions.
When uninformed parties claim debt consolidation loans have an adverse effect on credit scores, they may be referring to people who fail to curb overspending habits after securing a debt consolidation loan. For example, paying off high-interest credit card balances with debt consolidation loans brings multiple monthly payments under one manageable roof. But if people take out their zero-balance credit card and ratchet up limits all over again, they will not be benefitting their credit. By contrast, people who exercise responsible money management after securing a debt consolidation loan typically see their credit score improve due to the following:
- Credit Mix: A debt consolidation loan can help diversify your portfolio. If you previously only worked with credit card lenders, a personal loan can improve your credit score when paid on time.
- Credit Limit: It’s not uncommon for reporting organizations to calculate the percentage of available credit being used. When credit card and other outstanding balances are transferred to a debt consolidation loan, the leveraged portion can tick down. This often results in credit scores improving.
- Repayment History: As borrowers make regular monthly payments, they establish a positive repayment history that can improve their scores. Paying debt consolidation loans on time also gives lenders confidence in your abilities and may open the door to new opportunities.
- Hard Inquiries: It may be true that multiple hard pulls to someone’s credit history could result in a negative impact. Some Loan Specialists advise members to secure pre-approval before signing off. Pre-approvals are typically considered soft pulls and rarely result in significant credit score hits.
It’s essential for people who utilize debt consolidation loans to reduce monthly expenses and eliminate excessively high-interest rates charged by some credit card corporations. Irresponsible spending habits — not debt consolidation loans — drive credit scores down.
2: Debt Consolidation Loans Have High Rates
When people take out debt consolidation loans that are considered high interest, they may suffer significant credit blemishes. Like many other loan products available today, interest rates can differ widely and are usually linked to credit scores. The data on national debt consolidation loans indicates that products start with interest rates in the low single-digits. And when compared to some other resources, debt consolidation loans prove increasingly cost-effective.
Credit Union vs. Payday Lenders
People in the market for debt consolidation loans may want to consider the stark differences between working with a credit union versus a payday lender. Credit unions have a reputation of providing personalized customer service, improved interest on savings accounts, and the ability to offer low-interest loan products with minimal fees. These are a few reasons why credit unions are preferred over other lending institutions.
By contrast, payday lenders typically garner reputations for predatory practices. They offer quick cash based on cursory or no credit checks with the expectation people will pay exorbitant interest rates and onerous fees. It’s a no-questions-asked process that undermines people’s fiscal health and sometimes lands them in bankruptcy. That’s largely why people are better served meeting with a loan professional at a local credit union like Peach State, rather than opening the door to payday lending risks.
Types of Debt Consolidation Loans
It’s also important to understand wide-reaching, low-rate debt consolidation loans are available. Depending on someone’s credit history, personal assets, or home equity, personalized solutions can be secured. These rank among the preferred options offered by lenders.
- Home Equity Loans – Sometimes called a Second Mortgage, this fixed rate loan allows you to take advantage of the equity you’ve built in your home and offers no prepayment penalties if you pay your loan back faster than expected.
- Home Equity Line of Credit (HELOC) - HELOCs are an adjustable rate loan option that offers a line of credit based on a percentage of the equity in your home. The interest is often tax deductible, so be sure to consult your tax adviser when reviewing your options.
- Personal Loans – Transform multiple loan payments into one simple payment and pay down debt while improving your credit score. Personal loans can be processed quickly and there is no home equity needed!
- Low Rate Credit Cards – Take advantage of an introductory offer or a low rate credit card to consolidate your existing card balances into one simple payment with a lower interest rate.
People with low credit scores or those who have yet to establish a clear borrowing and repayment history may have fewer consolidation loan options. However, the member-friendly low interest rates, reduced fees, and ability to work closely with real people make your local credit union a tremendous resource.
3: Everyone Should Use a Debt Consolidation Loan
Saying that everyone should always use debt consolidation loans overstates the complexities of savvy borrowing. These loan strategies make sense for individuals who benefit from gathering multiple debts under one cost-effective umbrella. Although debt consolidation products serve a valuable purpose, it’s helpful to meet with a Peach State loan specialist to discuss the best solution for your individual financial situation.
How to Determine if a Debt Consolidation Loan is Right for You, How to Apply
If you are concerned about multiple debts and their interest rates dragging down your financial health and wellbeing, debt consolidation loans can prove invaluable. Start the decision-making process by identifying all of your outstanding debts. Keep in mind that debt consolidation loans can help clear up more items than just credit card balances. The right loan product can help with medical bills, student loans, gas cards, IRS debt, and even child support arrears in some cases.
Consider getting your free credit history report from the major reporting institutions and clearing up any blemishes. Raising your score will likely result in access to more loan products with lower rates. Once you’ve done what you can, consider opening a Home Equity Loan, Personal Loan or Low Rate Credit Card at Peach State. Not sure which solution is best for your financial situation? Visit any of our branch locations or call 770.580.6000 to speak with a Loan Specialist.