Looking for a way out of that debt cycle that has engulfed you and is slowly eating away at your finances? You might have encountered the term “debt consolidation” before and wondered what it meant. Here’s all you need to know about payday loan debt consolidation and the myths associated with it:
The Truth About Payday Loan Debt Consolidation
In short, payday loan debt consolidation is used by many people all around the world to get more control over their credit scores and finances. 58% of people who apply for payday loans cannot pay their monthly installments.
This leads to an accumulation of hundreds or thousands of dollars with really short terms. Most of the time, people apply for multiple payday loans and find themselves caught in a vicious cycle they can’t escape. But what if you could consolidate that into one debt?
Is it good or bad? That’s your personal decision. However, let’s debunk some myths so it is easier for you to decide;
Myth 1: It is a Scam
Debt consolidation is not a scam. It is a legit method many people use worldwide to pay off their debt. However, note that you can still come across many scams online. People caught up in a financial crisis may turn to these loan providers in hopes of a legitimate loan.
Investing in research and reading online reviews is important to find yourself a reputable company that has been around for at least two decades and is a registered nonprofit 501© (3) organization. Moreover, legitimate loan companies are never going to ask you for a lot of money upfront.
Even if they do ask you to consider debt settlement, consult a financial advisor and check if you are on the right track.
Myth 2: Payday Loan Debt Consolidation Ruins Your Credit Score
On the contrary, payday loan debt consolidation will lead to a much better score in the long run. Since a credit score depends on payment history and how much you have accumulated in debt, paying off more debt than you owe will improve the score.
Getting a personal loan to cover up your accumulated loans will lead to a hard inquiry at first. This may result in an initial dip in your credit score. Don’t worry; it is easy to make this up. You can recover from this quite quickly if you start making your payments on time immediately.
The less money you owe, the better your credit score. Since the drop at first is easy to makeup, it is much better to opt for consolidation and have one debt to pay. Just keep looking ahead and think of the time your score increases and the day you are debt free.
Myth 3: A Payday Loan Debt Consolidation is Hard to Manage
Debt consolidation is actually easy to manage, and you can choose different routes if required. Although you may have to research your options initially, you can consolidate your debt through a bank or credit union. You can also get an unsecured personal loan or go for a credit card with a 0% initial interest for balance transfers.
A payday loan debt consolidation is supposed to save you money. The initial process may be a bit harder than others, but many debtors pay your creditors for you and provide you with the final debt amount for you to pay. You also get a much lower interest rate.
If you have a lot of credit card, installment, or business debt accumulated, loan debt consolidation can help you with that too. However, payday loans have a much higher interest rate than personal loans, so keep that in mind.
Myth 4: Debt Management Plans Work the Same Way as Debt Consolidation
This isn’t true. Although the purpose of debt management and debt consolidation plans is the same (to help you pay off all your creditors easily) they are entirely different concepts. Debt consolidation is when you take out a loan and pay all of your creditors or allow your loan company to pay them off. You then get a new interest rate and terms for a new loan.
With a debt management plan, there is no new loan involved. You get to provide a debt management relief program with a monthly payment they use to pay off your creditors. Your credit advisor will typically provide you with a particular amount you can pay to the agency.
Eventually, this agency is going to send your creditors amounts in small installments. They can also join hands with the creditors and develop agreements to reduce your loan amount.
Myth 5: Debt Consolidation Worsens the Debt Cycle
In actuality, debt consolidation leads to a much better relationship with your finances. It improves your situation and pulls you out of the debt cycle in which you are trapped. However, remember that no amount of consolidation is going to fix your habits.
It is important to invest in financial literacy alongside your debt consolidation. Credit counselling should only be received by a company that knows what it is doing, such as Solid Ground Financial. Solid Ground Financial can provide the tools you need to adopt better financial practices and improve your credit history.
Final Thoughts
Payday loan debt consolidation doesn’t have to be difficult. However, it is important to plan for the future. A lot of factors need to be considered, such as the effect it will have on your credit score if you fail to pay it in the long run.
Remember to set reminders or automatic payments so that you don’t have to worry about paying your loan on time!
