Many people who are having trouble managing several loans at the same time tend to go for consolidated debt solutions.
What is a debt consolidation loan? Is debt consolidation a good idea or bad thing to do? Are there alternative options you can go for in case you don’t want to proceed with consolidated debt solutions? These are the questions that will be answered as you read on.
Debt Consolidation in a Nutshell
Debt consolidation is the process a debtor undergoes when they decide to restructure and combine all their smaller loans into one big loan. This is the usual alternative people choose when they can no longer pay their loans wherein each one has a different interest rate and repayment terms.
A debt consolidation company will pay all debts on your behalf, renegotiating the terms with your current lenders in order to get a better deal. All loans you have with your existing creditors will be cleared and in return, you’ll now be working with the new lender who consolidated your debts for you.
Benefits of Debt Consolidation
One of the most obvious benefits of debt consolidation is having a more manageable loan to repay every month. It makes debt paying simpler and more convenient.
You won’t be struggling to juggle multiple loans and thinking about how you can repay all of them every month. With a consolidated debt, all you need to worry about is the monthly payment for just one loan.
Another benefit of debt consolidation is the lower interest rates you’ll have to pay. Most of the time, people who want to get their debts consolidated hold credit cards which have high interest rates. They also hold short-term loans which have even higher rates than credit cards. Some may even have debts which have variable interest rates that change in tune with the prime rate.
Lenders providing consolidated debt solutions renegotiate your debts with existing creditors in order to bring the price and rates down. They pass on the reduced rates, allowing them to ask for lower instalments on your end.
Dangers of Debt Consolidation
Debt consolidation is not without any disadvantages. In fact, some financial experts say the dangers of debt consolidation outweigh the benefits it can provide.
For one, there’s the illusion debt consolidation creates. Some people may think they’ve paid off their other loans because they’re now just managing one loan instead of three or more. They feel they have the license to take on more loans or spend more because they’re doing monthly repayments on a single loan only.
Some people don’t see that the effects of debt consolidation appear in the longer timeframe. As discussed, consolidated debt solutions look cheaper to repay because of their low-interest rates. However, you have to repay the loan for years and years which is way longer than the term of your former loans.
If you look at the bigger picture, you’ll see that you’re actually spending more on consolidated debts compared to the individual debts you used to pay. You may be spending 5, 10, or even 20 years to fully repay the amount on your consolidated debt.
Some debt consolidation companies also charge high administration fees. If you have a good credit rating, you’ll get the best deal with the lowest interest rates. The contrary happens for those who have a poor credit standing.
Effects of Debt Consolidation
Consolidated debt solutions affect your credit standing. The smaller loans you have, get paid off when you undergo debt consolidation. This move positively impacts your credit rating because it will appear that you were able to pay off all your loans in one go.
Those who undergo debt consolidation should be committed to repaying the loan on time without exceptions. If you miss out or get delayed on payments, expect your credit score to be hit with a bad rating.
As long as you’re responsibly paying off your debts, credit agencies will see this as a good sign that you’re becoming a more responsible client. You can eventually mark off your past mistakes and start working towards a more positive rating.
Remember that consolidated debt solutions only combine all your smaller debts into one big loan. It isn’t some sort of ‘free’ money that wipes out all your debts without any drawbacks.
An alternative solution to debt consolidation is debt settlement. In debt settlement, either you or a representative makes a deal with your lenders to settle your debts by offering lump-sum payments. For example, you owe a lender R5 000. You can offer them a one-time payment of R4 000 and settle the whole debt, clearing you from any further repayment obligations.
The disadvantage of this option is that you have to undergo this process with each and every lender you owe. This can be a tedious task to do but it’s possible to save money with this process. Obviously, you have to weigh the pros and cons of debt settlement before considering this route over other options.
The better option recommended by financial advisors is debt management. It’s somehow similar to debt consolidation, but instead of the debts getting merged, the debt management company will consolidate all your monthly loan repayments. They will then take care of the payment on your behalf while renegotiating the possibility of interest reductions and waiving off of additional charges on the amount you owe to your lenders.
So, is debt consolidation a good option? Is it bad to consolidate your debts? Now that you know the advantages and disadvantages of debt consolidation, these may be the questions you have on your mind.
Convenience and lower repayments are the main benefits of debt consolidation. However, you should also consider the dangers of debt consolidation which involves the amount you’ll be spending on it in the long run.
If you are facing the risk of defaulting on your debts and you need a little wiggle room to manage them, then consolidated debt solutions are a good choice. It can be the lifeline to save your car, jewellery, house, and other things you offered up as collateral from being repossessed.
However, if you see it as a way to reduce the number of loans you’re holding and you have no plans of changing the way you handle debts and money, then debt consolidation is not the best option for you.
Debt consolidation can be either good or bad, depending on your financial situation and discipline. Going for a consolidated debt solution requires self-control in handling your finance. Look at it like it’s your last chance to correct your mistakes in borrowing money.