Debt Consolidation 101
Published: January 15, 2020
Categories: Debt Relief
Tags: Debt Consolidation, Debt Management, Getting out of Debt
Debt Consolidation 101
Being over-indebted is probably one of the biggest hurdles on the road to financial fitness and once in bad debt many don’t how to get out of it. When it feels like you’re drowning in a sea of bad debt, debt consolidation can be your lifejacket for debt relief.
This article outlines some of the important things that you need to know before you think about applying for a debt consolidation loan.
What is debt consolidation?
Debt consolidation is the process of combining all your existing debt into one consolidated loan which provides the following benefits to you as a consumer:
- You will have a single loan repayment for all your existing debt loans.
- You can also reduce the cost of monthly administration and insurance fees, as you will only be paying these fees on a single loan.
- You can reduce the cost of administration fees by up to 20% through debt consolidation.
- A consolidation loan also allows you to extend your loan repayment period.
- Your monthly loan payments are reduced and become more affordable.
Is it a good idea to consolidate debt?
Applying for a debt consolidation loan can see you living a debt-free life sooner than later, provided that you are committed to achieving a clear debt record and becoming more vigilant about your debt management. If you feel like you’re drowning in a sea of bad debt, a consolidation loan can be your rescue, provided that you are ready to become more responsible with your finances and commit to getting out of debt.
When should you consolidate debt?
Debt consolidation should be considered if your monthly debt repayment expenses are higher than what you can afford. The road to debt recovery is long and challenging but ultimately rewarding. If you are dedicated to slay the debt dragon, a consolidation loan might just be the answer you have been looking for.
What affects the outcome of a debt consolidation loan application?
Your credit score can affect the outcome of your debt consolidation loan application and also whether you will be able to afford the newly proposed repayments. Having a good credit score can reduce the interest rate charged on your consolidation loan. Having a bad credit score on the other hand can see you paying a much higher interest rate, as the financial institution will see you as a high-risk customer.
Do consolidation loans hurt your credit score?
Debt consolidation can affect your credit score in a positive or negative way depending on your behaviour. After successfully applying for debt consolidation, credit providers will consider your other accounts as being settled or paid in full, as all your debt is restructured into one single loan. This will have a positive effect on your credit score. Another way to improve your credit score in the long term is to ensure that make your consolidation loan repayments in a timely manner.
What is the downside to debt consolidation?
On the flip side of the coin, debt consolidation can also have a negative impact on your credit health.
- Missing any of your debt loan repayments can harm your credit score severely.
- Avoid closing credit card or retails accounts once these have been consolidated into a consolidation loan. Even though these accounts shouldn’t be used once consolidated, they still contribute to your credit score.
- Financial service providers see closing of accounts as the amount of credit made available to you decreasing, but your debt level remaining the same.
- Bear in mind that debt restructuring through consolidation will increase the total amount of interest you pay, meaning you will be paying off a higher total amount in the end.
What happens if you consolidate debt?
- You have to take full responsibility of your finances and become a more responsible consumer after you have applied for debt consolidation.
- Reflect on your past behaviour to see why you got yourself into debt in the first place,
- Steer clear of similar behaviour and spending habits in the future.
- Take control of your finances after applying for debt consolidation by becoming more disciplined with financial planning.
- Set-up a strict personal budget and stick to it. Failing to stick to your personal budget and returning to your old ways will see your debt consolidation dream being turned into a nightmare.
- It is crucial that you don’t make further use of credit to finance your expenses once you have successfully applied for debt consolidation.
If managed and applied correctly, the long-term benefit of debt consolidation can be positive to your financial wellness – it is up to you to determine the outcome of this journey. If you are ready to make a change for the better, speak to one of our financial advisers on the various debt consolidation loan options available to you or apply online now. Go back