As you may be aware, debt is a huge issue for military men and women and their families. Unlike most professions, debt can prevent service members from obtaining security clearances and/or promoting. In this guest post, our guest blogger Amy looks at the myths and facts regarding debt consolidation, especially as it relates to military servicemembers. But before we dive into these myths and facts, I’d like to define some of the jargon in the post below.
Debt Consolidation= The combining of several unsecured debts into a single, new loan that is more favorable. Debt consolidation involves taking out a new loan to pay off a number of other debts. The new loan may result in a lower interest rate, lower monthly payment or both. Consumers can use debt consolidation as a tool to make it easier to get out of student loan debt, credit card debt and other types of debt that aren’t tied to an asset. (Via Investopedia)
Security= In the post below, this term is used as a synonym for collateral and refers to the need of having some sort of property or asset that could be seized if the borrower does not fulfill his or her payments. For example, a house is a security in the case of a mortgage.
Principal= The amount of your payment going toward the amount you borrowed, in contrast to the amount of your payment going toward paying the interest accrued.
Unsecured debt= Unsecured debt is a loan not backed by an underlying asset. Unsecured debt includes credit card debt, medical bills, utility bills and any other type of loan or credit that was extended without a collateral requirement. (Via Investopedia)
Military debt consolidation myths and facts: Things you should be aware of
Military debt consolidation loans and programs offers financial help to the servicemembers in the military when they struggle to make their monthly payments on their unsecured loans. It helps military members pay off their loans in affordable monthly payments, avoid bankruptcy and achieve their financial freedom. However, there are many misconceptions that people may have acquired about military debt consolidation services. But it’s important for you to know about this type of service which can help to reduce your debts.
Thus, it’s equally important for you to know the myths and facts associated with consolidating your debts.
Myth 1- Military debt consolidation companies are military agencies
This is one of the biggest myths believed by military people. They may believe that the debt consolidation agencies are military companies and not civilian ones.
Fact- However, the truth is that these companies are normal debt consolidation agencies that help consumers who are not in the military as well.
Myth 2 -Debt consolidation does not need any kind of security
If you want to seek the help of a debt consolidation company, then you need some kind of security. Many mistakenly believe that they can seek debt consolidation without having any kind of collateral.
Fact- The fact is that as you seek debt consolidation by refinancing your home loan or by taking out a home equity loan, you’ll have to keep collateral that will act as a security in case you don’t fulfill your payments to the lender. A lender is more likely to grant a favorable loan if you have valuable property that then the lender may foreclose and/or seize.
Myth 3- Credit counselors can reduce your payment to its half
The next myth is that credit counselors may reduce your debt amount by its half.
Fact- The truth is no credit counselor can ever reduce your principal debt amount to its half. It’s just that they may refer you to a debt consolidation or a debt management program where the debt consultants may attempt to reduce the monthly payments by lowering the interest rates. Remember, only debt settlement can lower the principal amount but this highly affects your credit score and should be avoided.
Myth 4- Filing bankruptcy can solve the matter
There are many servicemembers who are led into believing that filing bankruptcy is not a big deal because it seems like there are thousands of people who are filing bankruptcy every month and then are restoring their finances.
Fact– Filing bankruptcy should be the last option for all consumers because this stays on your credit report for the next seven years and makes you highly unworthy for obtaining new lines of credit.
If you’re working in the military and you’ve incurred huge amount of unsecured debts, then debt consolidation might be the best remedy for you. There are many ways of consolidating your unsecured debts. Get to know each kind and consolidate in the best way possible so that you can profit while reducing your debts.
Author’s Bio: Amy Nickson is a web enthusiast. She shares her expertise through her crisp and well researched articles based on money management, money saving ideas and so on. You can follow her blog WorkingMomsWord where she shares her expertise on the personal finance field.
For more on debt, check out Part 2 of our Getting Started Series. (LINK)
For further assistance with debt and to know your rights, including those listed in the Sailors and Soldiers’ Relief Act, speak to your base’s legal aid office. Some unsecured debts, including credit card debt and some student loans, can be reduced through this Act.