If you’re struggling with managing your debt, you may be considering debt counselling or a debt consolidation loan as possible solutions to ease the financial strain. It is important to understand the difference between these two debt solutions, as although both are aimed at making managing your debt easier, they are two differently designed processes. […]
What is Debt consolidation?
Debt consolidation is a viable financial solution designed to simplify multiple debt repayments and, under some circumstances, save the debtor money. The process essentially involves taking out a single, new loan, at the lowest possible interest, to pay off multiple smaller debts. Some of the most common questions people ask those in the financial sector are:
- “When are debt consolidation loans a good solution?”
- “How did I end up in this financial situation?”
- “How common are my financial problems? Is this just happening to me?”
It’s certainly not only happening to you.
How do people end up so indebted?
The financial pressures of today’s economy continue to mount. Marketing has us exposed to an increasing amount of items to purchase and credit methods which will allow us to do so. In order to acquire all of the goods and services we’re told that we need to have, we’ve become a credit based society. Now you can have everything you’ve ever wanted at, seemingly, little cost – but the debt is mounting and the bill is coming. Here are some of the things which may have been purchased on credit to push you into a tight spot:
- Monthly groceries
- Clothing accounts
- Car payments
- Cell Phone contracts
- Household appliances
As to how common this issue is and whether it’s isolated to you, consider the origin of the global recession in 2009. Over extended credit to American citizens is what began the entire situation, when people just like you in the USA realised that they could not afford to pay back their loans.
Those who do not fully understand the intricacies of the system often state that taking out another loan to pay off previous loans doesn’t make sense – but it certainly can. If you have multiple creditors harassing you by phone (this process can be extremely unpleasant) and you want the calls to end, then a debt consolidation loan is the fastest solution. And, if it’s planned out very carefully, it can also be the most cost effective option.
It’s common practice in South Africa for creditors to sell your debt to other companies, and this is typically where payment notifications turn into harassment. Although it’s illegal, some of these debt collection companies will add nonsensical bills to your owed total – charging you every time that they have to make a call, whether they reach you or not.
If you feel like you’ve lost control, that these collection people are mishandling your account and costing you more money, a debt consolidation loan is one option.
What kind of consolidation loans are there?
Many financial experts will tell you to use your home loan (should you have one) due to the low interest attributed to it. Depending on your credit profile, your home loan rate is probably close to the current prime rate. This is typically much lower than the interest rate you’d score for short term loans or retail store cards. Short term loans can run anything from a 21% – 32% interest rate – which is why a debt consolidation loan on a much lower interest rate can work.
The interest rate you’ll get on this type of loan really depends on your credit score but most banks will offer this option if asked about debt consolidation loans for non-homeowners. Due to the National Credit Regulator cracking down on reckless loaning by banks, most will not even list consolidation as a service or product on offer. With proper planning and expert advice, the personal loan is a good way to proceed with a debt displacement strategy.
This can be an excellent way to get low interest loans for bad credit. You’re essentially securing the loan by attaching an asset to it, greatly reducing the risk to the lender thereby reducing your interest rate. You can attach big ticket items such as your house or car, but be certain that you’d be able to pay that loan back or those assets can be repossessed.
What’s the next step?
Remember above all that you are not alone out there. Contact DebtBusters directly for more information on debt consolidation loans, or our effective debt counselling service.
More Articles about Debt Consolidation
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.
The SARB increased interest rates in March 2016 in an attempt to curb inflation in South Africa. As a result the cost of borrowing money increased as well, leaving over-indebted consumers feeling even more stretched to make ends meet.
Winter is just around the corner and your spending patterns usually change during the colder months. This makes sticking to your monthly budget a bit of a challenge (who can resist those warm soups in the pouring rain).
Taking a Debt Consolidation loan could be an effective method for debt re-financing. It involves taking out one larger loan to settle many others. It is a financial solution designed to simplify multiple debt repayments and, under some circumstances, save the debtor money.