What are Your Options to Consolidate Debt

Should one consolidate debt in a time when interest rates are so low? Is it a good thing? The correct answer would be absolutely ‘yes’.

Why do so many people shy away from the option to consolidate debt? To answer that question we’ll discuss 2 options and what their good and bad points are.

Consolidate Debt with a Personal Loan.

If you try to consolidate your debt with a personal loan you will probably end up paying a large installment because personal loans go up to a maximum period of 5 years.

The interest on a personal loan is also much higher than a home loan. If you are not a home owner, then a personal loan is the only option you have if you want to consolidate debt.

Have a look at the various accounts you want to settle and compare that to the personal loans’ interest rate and decide if it would be worth while. As a last resort to improve monthly cash flow – add up what you want to consolidate and compare that to what the new personal loan installment will be and see if you will be better off at the end of the month.

Consolidate Debt with a Home Loan or Refinance Loan

If you are looking at using your home loan to consolidate debt it would be a wise option. This is because interest on a home loan (at time of writing this article) is only 10.5% and all other debts normally average to more than 20% p.a., so this shows you will save quite a bit per month.

You will immediately see a drastic improvement in your monthly cash flow after you consolidate debt, but remember, you should put at least half of what you now have extra into your bond account, otherwise you’ll be paying off those debts over 20 years.

So yes, by getting a loan to consolidate debt you could significantly improve your monthly cash flow, but you must look at the various interest rates and monthly installments before blindly going into it.

Click here for more information on how to consolidate debt.

Is Debt Consolidation For Me?

How do you know if you should apply for debt consolidation?  What is debt consolidation?  Will debt consolidation harm your credit record?

These are the common questions people ask when debt consolidation is contemplated and I will try to answer these in this article.

Debt Consolidation – what is it?

Debt consolidation is a way by which you can pay off all your smaller debts and roll them together into one big debt consolidation loan.

Debt consolidation should never be done if it is going to place you under administration or debt review – you should always ask questions and read everything before you sign documents.

Debt Consolidation – should I apply for it?

As mentioned in the point above, with debt consolidation you replace smaller debts with a big debt.  Debt consolidation should never be done if it comes with a high interest rate.

It will only work if you are taking smaller accounts, personal loans and credit cards and pay them off with a low interest debt consolidation loan.

The only way you will really get a good deal on a debt consolidation loan is to take a larger mortgage and use it for that.  But aren’t you at risk of losing your house?

If you can’t pay your debts and also go into arrears on your mortgage you are already at risk of losing your house.  If your credit cards, personal loans and accounts add up to R200 000 and you add that to your mortgage, do you know that it would only cost you an additional +/- R2000 per month.  With R200 000 in credit card and personal loan debt the installment on that would be close to R8000 per month.

That means that you will be R6000 better off every month.  Debt consolidation into your bond makes much more sense.

Debt Consolidation – will it harm your credit record?

If you apply for debt consolidation as mentioned above the short answer is no.  Mortgage debt is good debt, it’s the loans and credit cards that are bad.

The only way a debt consolidation loan can harm your credit record is if you are duped into putting yourself under administration.  That’s where a court order is obtained and your debts are placed in the hands of administrators.  Every month you would have them a certain amount and they pay off your creditors, after first taking their cut or commission.

The result is that for 7 years you will not be able to apply for a car loan, cell phone account – anything.

Be wary as many administrators trick people.

That explains debt consolidation in a nut shell.