Debt consolidation 101

Debt! Just the word alone will lead even a grown man to shaking at the knees. With life’s expenses, it’s so easy to accumulate debt to the point of feeling as though you are drowning in a sea of it. The answer: debt consolidation.

What is debt consolidation?

According to Investopedia, debt consolidation means taking out a new loan to pay off a number of liabilities and consumer debts, generally unsecured ones. In effect, multiple debts are combined into a single, larger piece of debt, usually pay-off terms that the client can afford such as a lower interest rate, lower monthly payment or both. Consumers can use debt consolidation as a tool to deal with student loan debt, credit card debt and other types of debt.”

Debt consolidation loans are used for two reasons

1) To make one's collective debt less costly

This is actually the less likely of the two reasons. A debt consolidation loan would only save someone money if they were using it to cover more expensive loans (like payday loans) which would become very costly if they weren’t paid off quickly. The debt consolidation loan in this case would save someone money if it was paid off as quickly as possible (thus limiting the amount of interest accrued).

2) To bring down monthly instalments (so that they can make minimum payments)

This is the main reason that people take out debt consolidation loans. They want to make minimum payments (and avoid all the extra charges and expenses that defaulters end up paying) but they have to restructure their debt with a consolidation loan to stretch out the payments. This reduces monthly instalments but increases the overall cost of the debt.

Is it a good choice?

If you’re keen to live a debt-free life soon, then applying for debt consolidation is a great choice. But only do this if you are committed to living debt-free. Things to keep in mind: your debt repayment will be high so ensure that you can afford it. A financial adviser will be able to guide you on making the correct choice that’s perfect for you.

What are things I need to keep in mind?

This is vital before you decide to apply for debt consolidation:

Credit score: Your credit score can affect the outcome of your debt consolidation application and also whether you will be able to afford the newly proposed repayments. 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. Also, debt consolidation can affect your score positively and negatively depending on how you manage your debt consolidation repayments.

Paying all your accounts in full will give you a positive credit record however missing a payment can impact your credit score negatively.

Requirements for applying for debt consolidation:

  • 3 months stamped bank statements
  • 3 months’ pay slips (please indicate a contact person and number for your HR division)
  • Copy of green bar-coded Identity book
  • Proof of residency
  • Details of your next of kin (name, address, contact number). Settlement letter of your latest existing loan accounts to be settled (maximum 5 accounts to be settled).

Criteria to pass for debt consolidation:

  • A clear credit record.
  • No arrears on your repayments.

What exactly will happen when you apply?

  • A financial adviser will check the documentation for accuracy.
  • A credit check will be done.
  • Your repayments will be calculated according to your to monthly income. This will guide the adviser on what you can afford to repay.
  • You will be required to sign documentation and the money should be paid out immediately.

Don’t let debt control you, get a loan that’s best suited for your budget.

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