As a country facing a lot of debt, we're doing our best to help South African consumers understand credit health, loans and other forms of finance. In this educational series, we're tackling the debt consolidation industry. Even though debt consolidation is the first step for many to escape mountains of debt, you should know as much as you can about it.
In this first post of our Debt Consolidation Education Series, we're going to talk about the basics of debt consolidation and its uses.
If you're considering a debt consolidation loan, we can help you responsibly compare options on our Debt Consolidation Comparison page.
So, let's get started with the basics!
What is a debt consolidation loan?
It’s a loan that allows you to pay off your current debts with a single loan and has different terms than your current loans or credit card debt. So, with other words, it is a form of Debt Refinancing that consists of taking out one loan to pay off several others.
It mostly refers to a personal finance process of attending to high consumer debt. A debt consolidation loan usually provides the borrower with more favourable terms such as a lower interest rate and, therefore, a lower total monthly repayment. It is important to note that the lower interest rate of a debt consolidation loan mostly exists as a result of an extended repayment term.
How does this work?
With a debt consolidation loan, you simply add together all the outstanding amounts you owe to various lenders and move the total amount to one debt consolidation lender. This lender takes on all the other debt and risk you had with it. You will thus have one monthly instalment with one interest rate, and instead of paying countless individual lenders, you’ll only click once to pay. This makes your repayments easier to manage - BUT, it does not make them vanish into thin air.
So is a debt consolidation loan the answer to bad debt? It could be.
The reason this type of loan can be helpful to you is that it can solve three of your worst obstacles:
- High-interest rates
- High monthly repayments;
- Possible confusion because of too many bills to manage.
“If you find yourself in these not so blue suede shoes, there is a good chance that your debt could grow faster than you can pay it off. This is when a consolidation loan can prove to be a viable option.”
A Debt Consolidation Loan may allow you to get a lower interest rate, which would save you cash in the long run. But, this comes at the cost of a longer repayment period. If you have considered it in the past and are unsure right now, these are the biggest benefits of debt counselling:
- you would like to effectively manage your debts with a single loan,
- enjoy a lower interest rate,
- settle your debt in a cost-effective way.
But keep in mind, it's only the solution to bad debt if you handle it with responsibility. While there are some real benefits to debt consolidation, it is important that you do your part in understanding that you are still responsible for your debt.
We realise that there is a lot of information to think through as each person’s situation is different. So, we want to help you make the right choice. If you are considering a debt consolidation loan, we encourage you to make use of our debt consolidation comparison page to compare the different lenders and their basic options.
To your better financial future!