Everything You Need to Know About Debt Consolidation

 In the current economic climate, the average individual finds it difficult, if not impossible to make large purchases without the use of credit. Home loans, vehicle finance, store accounts, credit cards and personal loans are all financial solutions intended to make your life easier, but if not used correctly, can land you in some serious money trouble.

Many of us are guilty of under-saving, overspending and not sticking to a monthly budget, which naturally results in increasing amounts of debt. This is where a Debt Consolidation Loan can help you.

What is a Debt Consolidation Loan?

Debt Consolidation is a method of refinancing or combining all of your current accounts into one new loan. The bulk of your financial obligation, if not all of it, is paid for by the new loan. The Debt Consolidation process typically results in a lower overall interest rate and a single monthly repayment as opposed to multiple.

Certain financial institutions in South Africa offer Consolidation on request as part of their Personal Loans offerings but do not typically advertise Debt Consolidation as a standard service.

Should you consider a Debt Consolidation Loan?

The most important thing to remember when considering a Debt Consolidation Loan is that your financial obligations do not go away. You cannot borrow your way out of debt; you will still need to repay it. Only now, you are paying one lender as opposed to many. In that regard, Consolidation Loans do make repayments simpler for you but there are few things you need to consider before applying.

A Debt Consolidation Loan only makes sense for you if the offered interest rate and repayment period are lower. If a Consolidation Loan cannot pay off all your high-interest debts or give you more affordable repayment terms, then you should consider alternate options such as debt counseling. Many people who opt for a Consolidation Loan due to lower monthly repayments and interest rates often fail to realise that due to extended repayment periods, they will end up paying more at the end of the day than if they had serviced their debts individually.

This is why it is very important that you choose a Debt Consolidation program suitable for your financial situation. If you do opt for a Consolidation Loan, make sure that it will benefit you financially and help reduce your personal debt, not add to it.

Ultimately, Debt Consolidation is a short-term fix and it won’t solve the underlying problem of bad spending habits. You will need to exercise financial discipline and restraint in order for a Debt Consolidation Loan to be fully effective and to ensure that you don’t end up in the same financial predicament, or worse, at a later stage.