For consumers who have opened up accounts and make use of credit to make purchases at multiple stores, it can easily become overwhelming when it comes time to settle those debts. You need to look at who you owe the largest amount to, who has the most favourable interest rate, which creditors are willing to negotiate and the list goes on.
To avoid all that many opt to consolidate their debt into one loan and pay of one lump sum to one institution making it easier for them to manage their financial burden from an administrative point of view, however, a consolidation loan isn’t always the best option financially in the long run.
How a consolidation loan works
Let’s take the example, you have three different store cards, and you’re paying off a car. Your minimum monthly payments leave you with almost no cash left to actually live. A way to solve this problem would be to consolidate your debt. You take out one single loan and use it to pay off all of your other loans, leaving you with one loan amount and payment every month which could be more manageable and have a favourable repayment period that suits you.
Things to remember with consolidation loans
- Your consolidation loan may have a longer term. That means you could end up paying more interest
- If you consolidate short-term debt such as clothing accounts, it could now take longer to pay off
- Consolidation makes more money available. Avoid using this extra money as an excuse to take more credit, placing you in the same situation you were before
Tip: Before you consolidate, don’t just think about how much and for how long you’ll be paying. Look at all the costs involved when you take credit.
The benefits of consolidation loans
- You have one monthly repayment amount instead of several individual ones
- Your total monthly repayment will be less
- You’re less likely to miss a payment, helping to maintain your good credit profile and improve your credit score
- Affordable credit insurance on loans longer than 6 months
What to consider before a consolidation loan
- It enables you to settle all your debts;
- It reduces your overall average interest rate;
- It reduces your monthly repayment – and that this repayment is reasonable, as a percentage of your income;
- The credit life insurance on the loan covers you for death, disability and retrenchment;
- The credit life insurance does not cost you more, and that the fees and costs of the debt consolidation loan (such as bond registration costs) don’t offset any interest rate advantage; and
- By taking out the loan you make provision for your financial needs for the next three to five years (for example, for school fees).
Debt review versus a consolidation loan
As mentioned before a consolidation does not necessarily solve the problem of debt but groups it into a bundle which may not always be favourable in your situation. Consolidation loans can leave you broke at the end of each month and keep you in the same or worse of for a longer period of time. An alternative to consider would be debt review.
When applying for debt review we at ezdebt will negotiate with your creditors on your behalf, walk out a reasonable payment plan and manage all your creditor payments until you’ve paid back all your debt and are now debt free and ready to move on with your life.
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