BUSINESS NEWS - Debt consolidation is a hotly contested debate. The truth is there is a right and a wrong time and way to do it.
Debt consolidation must be done for the right reasons.
Firstly let’s explain what debt consolidation is.
The idea behind debt consolidation is to take out a single, new loan to pay off all or most of your existing debts and liabilities.
You would use the money from the loan to settle all credit cards, personal loans, store accounts and any other liabilities or debts that you repay on a monthly basis.
You will then have one single debt, the new loan, which should be at a lower interest rate and lower monthly fees the combined payments you were making in the past.
The debt can be either a secured loan (ie. using your house as collateral) or unsecured.
A secured loan will normally offer a much lower interest rate.
You do not get rid of the debt; you are simply moving all the individual debts into one single debt.
People often take this route when they are struggling to manage and pay all accounts that are due every month.
Is does not solve all your problems so look at the reasons and spending habits that got you into the debt in the first place and see if changes need to be made.
You can not borrow yourself out of debt so be sure to manage the new debt well and do not start using the old accounts again, creating more debt.
Advantages of Debt Consolidation
There are a number of advantages to taking out a loan to consolidate your debts. Firstly is that it simplifies matters.
There is no need to look at numerous statements every month and manage multiple accounts and debts.
By having one single loan to worry about, it is easier to focus.
If you have done it correctly, the new interest rate should be lower than the majority of the debts that you had previously and the monthly repayment should be lower.
If you were able to pay the accounts before, continue to pay what you paid previously.
This will allow you to pay the new loan off much faster and save a large amount of interest.
If you were having difficulty paying all accounts on time before the consolidation and you are better able to afford the new loan repayments, it will have a positive effect on your credit rating.
It can also have some negative impact on your credit score as the will be a single, new debt with no history and your debt to credit ratio will drop.
This is just in the short term and will improve over time.
Potential Disadvantages of Debt Consolidation
There are a number of potential pitfalls you will want to avoid if you do decide to go the debt consolidation route.
The first thing to consider is that it is going to take serious financial discipline from your side.
If you consolidate your debts and then start spending on those paid up accounts or opening news ones, you will be in a much worse situation than you were before.
Pay the debts off, close the accounts and do not use them again or take on any new ones.
The other aspect to consider is the term of the loan.
If, for example, you only have 4 months left on one of your debts, it might now be consolidated into a loan with possibly 60 to pay.
Even though you are paying a lower interest rate and you pay less per month, if you do not pay extra into the loan, many of the debts will end up costing you a lot more over the period of the loan.
The other risk is that if you have used your house as collateral for the loan, you are putting it at risk if you are unable to repay the loan for some reason.
How to consolidate your debt
While there are some companies that offer this as a service, it obviously comes at a cost. You can do it yourself, with a little bit a homework and a whole lot of discipline.
The first thing to do is to investigate what loan amount you would qualify for and what interest rate you would get.
Work out, or get the loan provider to tell you, the monthly cost of the loan as well as the total cost over the period of the loan.
Next, you have to make a comprehensive list of all your debts. Make a list with the monthly repayment, the interest rate and the remaining number of months that still have to be paid.
Work out your total monthly repayments as well as the total amount still be paid on each account if you were to continue to pay monthly.
You should now be able to compare the two quite easily to see if it will make financial sense to take the loan.
Assuming is does save you money and you decide to go ahead with the loan, you will be responsible for paying off all the accounts.
Make sure that you do this.
If your loan is not sufficient to pay off all of your loans, pay off the ones with the highest interest rates first.
If you have the financial discipline, you do not have to close your credit cards completely. You could keep them open for emergencies and just pay the service fees.
If you lack the discipline, close them.
The Bottom Line
If you are consolidating your debt to reduce interest, or for short-term relief to help you meet your monthly commitments, then it can be a good idea.
Ensure you have done your research and comparison correctly and the new loan will cost you less overall, not just monthly.
As soon as you can, pay extra funds into the debt to reduce the total interest that you pay.
If you want to apply for a personal loan and get the money paid out in your a ccount within 24 hours then go to sapersonalloans.co.za
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