Nobody plans to take on unmanageable debt because nobody wants to be burdened with late payment charges and increasingly high interest rates. But it's also true that nobody is in complete control of their lives. Life doesn't always follow the script, with the unexpected striking at any moment - a family member falls sick, your roof starts to leak, and your car packs up all in one week. For those who find themselves heavily in debt, there's a financial product to ease the burden: the debt consolidation loan.

What is debt consolidation?

In a nutshell, debt consolidation allows you to pool your debts into a single loan, making it much easier to manage repayments.

How does debt consolidation work?

If your application for a debt consolidation loan is approved (you’ll have to meet certain risk criteria), your credit provider will pay off your outstanding loans and pull the collective debt into a single larger loan. This makes repayment easier while also saving you money in admin fees.

A debt consolidation loan will have a longer loan term than your original credit accounts. This lowers your monthly instalment, making it more affordable. But it also makes your debt more costly in the long run since it increases the amount of interest you pay. For this reason, you should always aim to pay off your debt as quickly as possible - even if you initially use a debt consolidation loan to make monthly repayments more affordable.

When your outstanding debt has been settled, your loan accounts (such as personal loans) are closed, but your store and credit cards remain open (if you’ve had trouble managing your debt, it would be a good idea to close these).

What are the benefits of debt consolidation?

The first obvious benefit to debt consolidation is that it reduces your many creditors to one. This helps you in two ways:

1. It simplifies repayments, and it makes it easier to budget, since you know exactly how much will be debited from your account every month.
2. It can reduce your monthly instalments by spreading your repayments over a longer term. Of course, this is only an advantage if you’re currently struggling to make minimum repayments.

What are the risks associated with debt consolidation?

Lower monthly instalments might free up some of your budget, but this shouldn’t be interpreted as greater spending power. Such an attitude could land you in even more debt. If you have any disposable income, it should go straight into paying off your debt consolidation loan.

Another risk with debt consolidation is that while it can help you make minimum repayments, it invites you to stay in debt longer, which, as has already been pointed out, raises the cost of your debt and increases the chances of you accruing more debt. If you take out a debt consolidation loan, your goal should be to pay off your debt as quickly as possible, even with the lower minimum repayments.

Does my credit score affect my debt consolidation loan application?

Your credit score can affect the outcome of your debt consolidation application and whether you’ll be able to afford the newly proposed repayment. A good credit score can reduce the interest rate charged on your consolidation loan while a bad credit score can see you paying higher interest rates, as the financial institution will see you as a high-risk customer. Check your credit score online for free.

Will my debt consolidation loan affect my credit score?

That depends on you. Debt consolidation can affect your score positively or negatively, depending on how you manage your debt consolidation repayments.

Who is debt consolidation for?

If you’re struggling to make repayments but still have an acceptable credit score, then a debt consolidation loan can give you a little breathing room by lowering your monthly instalments. If you decide to take this route, you’ll need to adjust your spending habits so that you’re 100% sure that you can make the minimum repayments. It would actually be better to pay back more than the minimum instalment every month so that you shorten the time that you’re in debt. Get more information on how Old Mutual Debt Consolidation Loans work or apply for a loan online.

If you’re over indebted (you find it difficult or impossible to pay your debt and monthly bills), you’ll have to consider debt counselling. With debt counselling, your debt is assessed by a debt counsellor, who then helps you draw up a budget and makes recommendations to your creditors. 

Debt counselling vs debt consolidation