Debt consolidation What is it?
Debt consolidation is a viable financial solution designed to consolidate multiple debt repayments (make all your debt into one) and, under some circumstances, save the debtor money. The process essentially involves taking out a single, new loan, at the lowest possible interest obtainable, to pay off multiple smaller debts.
Some of the most common questions people ask those in this particular financial sector are:
The first thing to understand is that it’s not just happening to you, South Africa is in a serious economic state at this moment in time.
How do people end up so indebted?
The financial pressures of today’s economy continue to mount, read the papers watch the news it’s not getting any better. Marketing has us exposed to an increasing amount of items to purchase and credit methods which will allow us to do so, often very questionable means if you look in your paper seeing adverts of “loan consolidation”.
In order to acquire all of the goods and services we’re told that we need to have, we’ve become a credit based society. Now you can have everything you’ve ever wanted (granted the bank owns it until fully paid and that includes the clothes you bought on account) at, seemingly, little cost – but the debt is mounting and the bills are still coming in.
Here is a list of some of the things which may have been purchased on credit to push you into a predicament:
- Monthly groceries
- Clothing accounts
- Car payments
- House payments
- Cell Phone contracts
- Household appliances
- School fees
- Medical bills
This is not an uncommon phenomenon; remember the global rescission in 2009?
Over extended credit to Americans is what began the entire situation, they even made movies about it and if you watch any American T.V. Series you’ll still hear mention of it.
Essentially what happened is people just like you and me in the USA realised they could not afford to pay back their loans…the banks and credit providing institutions had recklessly lent out money to consumers.
When is a debt consolidation plan a good idea?
Those who do not fully understand the intricacies of the system often state that taking out another loan to pay off previous loans doesn’t make sense…it obviously seems like a bad idea and often is – but it certainly can work out beneficially in some rare instances.
If you have multiple creditors harassing you constantly, SMS’s, calls to your work, late at night, you friends and family (this process can be extremely unpleasant) and you want the calls to end, then a debt consolidation loan is the fastest solution. And, if it’s planned out very carefully, it can also be the most cost effective option.
Its common practice in South Africa for creditors to sell your debt to other companies, and this is typically where payment notifications turn into harassment. Although it’s illegal, some of these debt collection companies will add extra costs to your outstanding debt account total – charging you every time that they have to make a call, whether they reach you or not, SMS’s sent, letters sent (apparently) and even emails.
If you feel like you’ve lost control, that these collection people are mishandling your account and costing you more money, a debt consolidation loan is one option.
What kind of consolidation loans are there?
Many financial experts will tell you to use your home loan (should you have one) due to the low interest attributed to it. Depending on your credit profile, your home loan rate is probably close to the current prime rate; remember the rate also just escalated. This is typically much lower than the interest rate you’d score for short term loans or retail store cards. Short term loans can run anything from a 21% – 32% interest rate – which is why a debt consolidation loan on a much lower interest rate can work.
The interest rate you’ll get on this type of loan depends upon your credit score but most banks will offer this option if asked about debt consolidation loans for non-homeowners. Due to the National Credit Regulator cracking down on reckless lending by banks, most will not even list consolidation as a service or product on offer. With proper planning and expert advice, the personal loan is a good way to proceed with a debt consolidation strategy.
This can be an excellent way to get low interest loans for bad credit. You’re essentially securing the loan by attaching an asset to it, greatly reducing the risk to the lender thereby reducing your interest rate. You can attach big ticket items such as your house or car, but be certain that you’d be able to pay that loan back or those assets can be repossessed.
Why not consider Debt Counselling over Debt Consolidation?
Sometimes the consolidation loans offered loan & financial institutions aren’t nearly enough to satisfy your debt obligations.
Instead of taking whatever the credit provider is able to offer you, which may not be enough to settle all of your creditor accounts leaving you ultimately trying to figure out how to pay the remaining; debt counselling could offer an option for those who would like to become debt free while being able to offer legitimate legal protection to ones assets such as your home or car.
Debt counselling provides the opportunity to bring your monthly debt repayments down by as much as 30 – 50% (but debt counsellors have been able to negotiate reductions as much as up to 60% in the past). Professional debt counsellors can negotiate lower interest rates and fees with creditors. The outcome is one affordable monthly instalment, making provision for you to cover your normal living expenses as well.
Remember above all else that you are not alone out there.
Contact OUDS directly for more information on debt consolidation, our effective debt counselling process OR any of our effective Phalanx services.