Debt consolidation is a loan that you would take out to consolidate several smaller loans into one loan. Basically, paying off the balances of all the other loans. The goal of a consolidation loan is to reduce monthly instalments usually by means of lower interest rates and extended payment terms.
31 July 2015
Most credit active consumers think the best way to settle debt is by taking out a consolidation loan. Consolidation loans do not settle debt, they merely group up your debt obligations into one new loan amount. The benefit is one monthly repayment with one interest amount as opposed to paying varying interest rates across multiple debt obligations. When you take out a consolidation loan, the amount borrowed is used to settle your old debt obligations, leaving only the consolidation loan for you to repay each month. In summary, a consolidation loan pays multiple old loans with another bigger new loan. You are essentially paying old debt with new debt.
Debt consolidation loans appear to be cheaper but they aren’t
Even though you may appear to be saving on interest, consolidation loans can be expensive as they fall into the category of unsecured credit and normally have a fixed interest rate for the duration of the loan. This means that you won’t be able to negotiate on the interest with the bank. In addition to this, you will be charged a new initiation fee on the loan.
How to make a debt consolidation loan work for you
Most consumers seeking to consolidate their debt set out with the best intentions in the world; to consolidate their debt, pay it off and become debt free. However, this is seldom achieved. Many take a consolidation loan and because all their old debt is settled, their credit score with the credit bureau improves, meaning that they become eligible for more credit. As soon as you take new credit after your first consolidation loan you are well on your way to becoming over-indebted. It won’t be long before you are attempting to get a second consolidation loan in order to consolidate your debt for the second time… and so the cycle continues until your loan amount is so big that you can no longer afford your living expenses.
The debt consolidation loan “don’ts”
Consolidation loans do not:
- Provide debt relief to those in arrears and those that are over-indebted
- Clear credit records to those with judgements and accounts in default, therefore there are no “bad debt” consolidation loans
- Take into account vehicles being financed
- Get you debt free
If you are facing financial difficulties even after having had consolidated your debt before, it is wise to seek assistance from a debt counsellor. Debt Counselling is a sustainable debt solution that will benefit you in the long run. Your monthly payments will be consolidated, interest rates reduced and you will become debt free without the temptation of taking out more credit.
If you need assistance with your debt, speak to DebtBusters, South Africa’s largest and most trusted Debt Counsellor. Solve your debt problems for good. Act now! Call 086 999 0606 today or visit www.debtbusters.co.za , fill out the free call back form and have a financial consultant call you back!