NEW YORK, NY / ACCESSWIRE / August 29, 2024 / Debt relief can feel like an uphill battle, especially when it's not clear where to start. There are various paths to becoming debt free and regaining financial stability, with no one-size-fits-all solution. One effective approach to begin eliminating debt is debt consolidation, which involves combining multiple debts into a single loan with a lower interest rate and more-manageable monthly payments. National Debt Relief, a leader in debt settlement and debt consolidation, specializes in this approach and has extensive expertise in the pros and cons of debt consolidation.

Alex Kleyner, CEO and co-founder of National Debt Relief, acknowledges that while debt consolidation may not be the perfect fit for everyone, it is a powerful strategy borrowers should consider when evaluating their debt relief options.

"When someone begins their debt relief journey, they are often confronted with numerous challenges and questions, and it's easy to get sidetracked by the overwhelming amount of information available," says Alex Kleyner. "At National Debt Relief, we're here to provide clarity and support every step of the way. Our goal is to debunk myths around all types of debt relief to ensure individuals can choose the right option for them."

Understanding Debt Consolidation

Debt consolidation is the process of combining multiple debts into one loan with a single monthly payment. By consolidating debts, an individual can simplify their finances and eliminate the need to manage multiple payments to different creditors. This can help prevent missed payments, reduce stress, and even save money depending on the terms of the new loan.

There are several ways to consolidate debt, such as using a Home Equity Line of Credit (HELOC), refinancing a mortgage, or obtaining a new personal loan. A HELOC allows an individual to borrow against the equity in their home, providing the flexibility to use those funds to pay off unsecured debts such as credit cards. Refinancing a mortgage can also allow a person to access the equity they have in their home. Personal consolidation loans are another option, particularly for those with smaller debt amounts and good credit. With any of these options, the benefits are typically dependent on whether the new loan offers better interest rates and repayment terms than the existing debt. Each loan type has its own requirements and benefits, so choosing the right one depends on a borrower's individual financial situation and goals.

"Debt consolidation can be a valuable tool for those looking to manage their finances more effectively," says Alex Kleyner. "It simplifies payments and can lower overall interest costs, but it's crucial to understand the terms and ensure the new loan will truly benefit your financial situation in the long run."

Debt Consolidation Myths

While debt consolidation can be a powerful tool for managing debt, it's important to explore any debt relief option in detail and to understand any myths surrounding it. According to Alex Kleyner, "It's crucial to distinguish facts from misconceptions to make informed decisions."

Here are some of the top misconceptions about debt consolidation services:

1. Debt consolidation always means better interest rates and lower monthly payments.

   Consolidating debt generally requires taking out a new loan to pay off existing debts. This may not help if the terms of the new loan are no better than those of the existing individual debts. The interest rates available for new loans may change over time based on changes in the economy and other external factors. Unfortunately, even during periods with relatively low rates, not all borrowers will have access to the most advantageous interest rates.

   For example, a homeowner with existing high-interest credit card debt may receive an advertisement in the mail for a home equity loan that offers very low interest rates, which might seem appealing. However, it's important to note that qualifying for these low rates typically requires meeting stringent criteria. If an individual doesn't meet the lender's standards for the best rates, they may be asked to pay an interest rate that is 4% or 5% over the prime rate plus potential up-front fees as high as 1 or 2 points. In other words, the new loan might actually end up costing more than it would save the borrower.

2. Credit counseling could get monthly payments cut in half.

   A reputable credit counselor might be able to negotiate with creditors to lower an individual's interest rates and waive any late payment fees. This could result in lower monthly payments compared to what a borrower is currently paying, but it likely won't reduce their payments by as much as 50%.

   If a credit counselor promises to cut payments in half, individuals should be cautious-it might just be a manipulation of numbers. For example, if a client usually pays $100/month but recently missed a payment, their current bill may show a $200 or more due to the overdue balance and any late fees. Getting the lender to reset the payments to $100 isn't the same as "cutting payments in half," especially if the extra amount owed is just added to the end of the loan. Any time a credit counselor is able to change the monthly payment on a debt, it's important to understand what impact that will have on the debt overall. The reduced payments could mean that the borrower will incur significantly more in interest charges and end up making payments for years longer than originally anticipated.

3. One credit counseling agency can negotiate much lower payments than another agency.

   When a borrower goes to a consumer credit counseling agency, the counselor will likely help them create a debt management plan (DMP)-an alternative to debt consolidation that can still simplify and hopefully reduce monthly payments. Once a DMP is ready to present, the counselor will contact the existing lenders to present the plan for approval. If all of the lenders approve the plan, the borrower may no longer need to pay the lenders directly. Instead, they will typically make one monthly payment to the counselor, who will then distribute the funds to the creditors.

   However, it's a common misconception that some credit counseling agencies can negotiate lower DMP payments than others. In reality, most lenders have policies that automatically enroll individuals in their existing programs once they join a DMP. This means that regardless of the credit counseling agency a borrower chooses, the monthly payments they end up with will likely be more or less the same.

4. An individual can't benefit from debt relief strategies without a formal program.

   The bottom line is that any individual can essentially create their own debt relief plan. Most creditors, including credit card companies, have special reduced-interest programs for borrowers who are struggling. However, this often requires making multiple phone calls and knowing exactly what to ask for. Individuals will need to be persistent since it's unlikely they will reach the company's hardship program department on the first or second attempt. When they do finally get through, it's important to be polite and prepared to ask for something specific, like a reduced interest rate.

   One do-it-yourself strategy for debt consolidation is to take advantage of credit card offers for fee-free balance transfers and low introductory rates. Using this new card to transfer existing balances away from high-interest cards could provide a borrower with a window of time to pay down their debt before the promotional period expires. Although this approach may seem promising, a borrower needs to set realistic expectations about how long it may take to pay off the debt, and carefully consider what would happen if they still have a balance when the rates eventually increase. The potential downsides can quickly snowball, especially if a borrower continues to take on debt on their other cards in the meantime. Any debt relief program-DIY or not-should include a plan to ensure no new debt is incurred until the original debt is paid off.

5. An individual will always save money through debt consolidation.

   If an individual is told that a debt consolidation loan will save them money, they should use a loan calculator to verify the claim. For example, if a lender promises financing with no out-of-pocket costs, it's important to check that they aren't simply adding their fees to the loan amount, which would result in paying interest on those fees.

   To fully understand the terms, consumers should compare the total of their current monthly payments to the expected monthly payment with a debt consolidation loan, making sure to account for all fees and any voluntary contributions. They should also consider the length of the new loan term and compare that to the timeline for paying off their debts without the loan. If the loan offering doesn't meet a borrower's savings goals, they may want to consider alternatives to taking out a debt consolidation loan.

6. Bankruptcy is no big deal.

   Sometimes, young people are led to believe that declaring bankruptcy is a better option than working to pay off their debt. This may seem tempting, especially when hiring a bankruptcy attorney for as little as $500 could potentially lead to thousands of dollars being discharged in court.

   Bankruptcy has lasting consequences and should be a last resort. It severely impacts an individual's finances for 7-10 years. It can also exclude someone from certain types of employment opportunities and make it harder to obtain financing, such as a mortgage or auto loan. An individual might still owe some debts after bankruptcy, and there's no guarantee of approval even after paying upfront fees. It's crucial to inquire about approval chances before making any commitments. There are also several alternatives to consider before filing for bankruptcy.

National Debt Relief provides multiple debt relief options and can help individuals develop a manageable plan to get out of debt. They have the know-how and the resources to help borrowers navigate their options and then support them through the process. They regularly check in with clients to answer any questions and ensure everything is progressing smoothly.

While debt consolidation can be an effective tool for simplifying and managing debt, it's not a one-size-fits-all solution. Understanding the potential benefits and drawbacks is crucial for making an informed decision. As Alex Kleyner notes, "The key to successful debt management lies in thoroughly understanding your options and choosing the strategy that aligns best with your financial goals."

By carefully evaluating an individual's unique situation and considering professional advice, they can make a more informed choice that supports their long-term financial health.

CONTACT:

Andrew Mitchell
media@cambridgeglobal.com

SOURCE: National Debt Relief