Is Debt Consolidation For Me?

September 28, 2009

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.

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