23 Aug Consolidating debt
There are many solutions and strategies that over-indebted consumers have to help them reclaim their financial freedom – consolidating debt is one of them. Debt consolidation can be defined as the process of moving debt from many different accounts into one account, or simply settling all of your loans by taking out one big single loan.
A consolidation loan can be a secured loan (a loan backed by collateral such as a house or a car which can be repossessed if you don’t repay the loan), for example a second mortgage, or an unsecured loan, such as a personal loan. Unsecured loans are riskier, therefore a higher interest rate may apply.
Why do people consolidate debt?
The main aim of debt consolidation is to reduce the amount of interest and monthly fees you are paying to cover your debt. People who choose this option to take control of their finances are often already financially stressed.
Should you consolidate your debt?
There are many arguments for and against debt consolidation:
Cons: Critics argue that moving your debt into one account tricks you into thinking you have less debt. They believe that the answer doesn’t lie in restructuring your debt, but that consumers should stop excessive spending and learn to live within their means. They see debt consolidation as a Band-Aid on a wound, and not as a remedy for the underlying problem. Experts warn that you can’t borrow your way out of debt, and if you continue to engage in reckless credit behaviour, a consolidation loan could make the situation worse.
Pros: If you are a disciplined person and choose to go the consolidation route, you can effectively manage and pay off your debt. The benefits of loan consolidation are:
- Simplifying your finances – instead of repaying multiple small amounts, you only have to remember one monthly repayment.
- A lower interest rate over a longer period – making the overall repayment more manageable. This way you have a little more money in your pocket to get through the month.
Before opting for a debt consolidation loan, the Debt Counsellors Association of South Africa recommends that you make sure that:
- it enables you to settle all your debts
- the overall lending rate is lower
- the monthly repayment amount is reduced
- you are offered life insurance (for death and disability) with the loan
- the fees and monthly costs of the consolidation loan won’t cost you more