Over-indebted consumers are faced with a number of options to choose from when it comes to getting out of debt. One of these options is a debt consolidation loan.
How do debt consolidation loans work?
A debt consolidation loan is one single loan taken out to pay off other debt. The purpose of this is to reduce monthly debt repayments by extending payment terms. Over-indebted consumers who choose to take out a new loan to repay other debt do so in the hopes of freeing up more of their monthly income by only making one payment towards their debt every month. However, it’s often not a solution to their debt but a temporary band aid. It’s important for you to know a bit more about consolidation loans before deciding whether to consolidate your debt with more debt.
The downside of debt consolidation loans
It is true that you may pay lower monthly instalments towards your debt if you consolidate it with a new loan, however, this is due to the extended payment terms allowed by the credit provider. This does not mean you are paying less towards your debt. In fact, because you’re taking longer to pay off your debt, you will end up paying more in the long run. Additionally, your credit provider may increase your interest rates unexpectedly, making it difficult for you to make ends meet.
Consumers often perceive consolidating their debt with a debt consolidation loan as less stressful than paying multiple creditors monthly. However, while a debt consolidation loan may seem like a great way to relieve you from the pressures of your debt, it may cause more harm than good. Since your credit cards will be cleared (and replaced by your consolidation loan), you may end up spending more and incurring more debt, instead of saving for an emergency or trying to pay off your current debt faster. To really understand debt consolidation loans, let’s look at a simple example and consider if you should take out a debt consolidation loan.
Why should you choose debt counselling instead?
If you can’t afford to cover your living expenses in addition to your debt repayments, speak to a debt counsellor. Debt counselling may be a better solution to your problem.
Over the years, debt counselling has earned its reputation as one of the most successful ways of getting rid of debt. The process was introduced by the National Credit Act (NCA) to help consumers get out of debt and prevent them from being blacklisted. It is ideal for consumers who are struggling to make ends meet while covering their debt repayments. It is a safer and more effective solution than taking out a debt consolidation loan, which, more often than not, ends up being a short term solution to debt.
Debt counselling includes:
- A personalised affordable monthly budget
- Legal protection against creditors
- Restructuring of debts so that you only have one affordable monthly debt repayment