If you have more debt than you can handle you might want to consider some form of debt relief. While South Africa offers a variety of debt relief options, you’ll need to find the best one that fits your financial situation. A debt consolidation loan might be an option, but is it the best option for you?
What exactly is a debt consolidation loan and how does it work?
What is a debt consolidation loan?
A debt consolidation loan is when you combine all your current debt into a single debt repayment. A creditor will take over all the debt you have and place that total amount into the new loan. This new loan usually comes with new terms.
These terms generally include lower monthly repayment, lower interest rates and a longer repayment period.
It’s important to note that your debt won’t be erased, instead, your debts will be transferred to a new creditor or form part of a new type of loan.
How do debt consolidation loans work?
When you apply for a consolidation loan the creditor that you apply with will take over all the current debt that you have and place that into a single new loan amount.
Once a creditor combines, or consolidates, all your debt and offers you a new loan, you will only be responsible for this one loan.
However, creditors may extend the loan period of the loan.
For example, instead of paying off all your debt in 24 months, you’ll be paying off your debt in 48 months.
Although that might sound like a good deal, it may cost you more in the long run. The longer your repayment period is the more you’ll be paying in interest. And that can become very costly.
Like any other loan, it’s up to you to pay off your consolidation loan as quickly as possible.
This is where consolidation loans can do more harm than offer debt relief.
Because of the lower interest rates and lower monthly instalments, most people only pay the minimum monthly instalments. And they use the rest of their income on unnecessary expenses or they end up making more debt.
There are other debt-relief options available that would protect you from making more debt and would help you become debt-free as soon as possible.
How long does debt consolidation take?
Generally, consolidation loans last over 3 to 5 years or over 60 months. It all depends on how much debt you have and how much money you’re throwing towards your debt.
Advantages of debt consolidation
- Lower interest rates
Consolidation loans usually come with lower interest rates. However, creditors may extend the repayment period of the loan as well.
For example, instead of paying 25% interest on a loan over 30 months. You will be paying 15% interest over 60 months.
Just because you’ll be paying a lower interest rate, does not mean you’ll be saving money.
- Make a single monthly repayments
Consolidating your debt allows you to make a single monthly repayment towards your debt, instead of paying several creditors separately.
Disadvantages of debt consolidation
- Falling deeper into debt
One of the biggest dangers of debt consolidation is getting yourself deeper into debt, without solving the problem at hand.
Once all your debt has been consolidated, it will seem as if all your debt has been settled. Because of this, creditors may start offering you new loans. Which could hurt your financial situation in the long run.
Because you’ll be paying a lower monthly instalment, you’ll have more cash available throughout the month. You may start overspending this money on non-essentials instead of paying off your debt. Which will keep you in debt for longer and cost you a lot more.
- Interest is expensive
One of the greatest benefits of debt consolidation is lower interest rates. But, you’ll be paying off your debt over a long period. The interest may be lower, but you’ll be paying more over time.
- Consolidation loan scams
Some unlawful creditors market their services to those who are desperate to change their financial situation. These creditors may offer very high-interest rates, overextending the loan repayment period and charge penalty fees for missed payments.
If you are considering a consolidation be aware of the costs and the debt commitment you’ll be getting yourself into.
- You may not qualify for a consolidation loan
Although debt consolidation loans may appear to be a quick and easy way to lower your monthly debt repayments and free up some cash every month, not everyone will qualify for this type of loan.
You will need to have a good credit score, your debt to income ratio needs to be low and you need to have a good repayment history. If you’ve already started missing payments on your accounts or paying late, you most likely won’t get accepted for a consolidation loan.
Other debt relief options
If you’re looking for a debt relief option with high success rates and protection from creditors and being blacklisted, we recommend the debt review process. This form of debt relief is similar to debt consolidation, but there are a lot more benefits.
The benefits of debt review include:
- An affordable monthly budget
- Restructuring of debts so that you only pay one monthly debt repayment
- Taking overall communication with credit providers
- Negotiating with credit providers for reduced payments
- Legal protection
Find out how debt review can help your financial situation – click here.
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