Dealing with multiple debts can be overwhelming, and many people seek relief through debt consolidation options. Some solutions, such as a debt consolidation loan, offer the promise of wiping out existing debts and providing smaller monthly payments, easing the financial burden. However, it’s essential to understand that these consolidation loans are merely large personal loans and not comprehensive debt management solutions.
What Is A Debt Consolidation Loan?
A debt consolidation loan is a big sum of money that is used to wipe out most, if not all, of someone’s debts. It comes with a longer repayment term, which means smaller monthly payments. Moreover, this can provide some relief to the consumer. Major banks and credit providers, such as Old Mutual, FNB and Direct Axis, offer these loans.
However, there’s a significant common misunderstanding about debt consolidation loans. Many think it’s a debt management solution, but in reality, it’s simply a large loan. The individual has the freedom to use the funds as they see fit, which is one of the few pitfalls that the consolidation loan has. It’s crucial to weigh the pros and cons before taking the plunge into consolidation.
Consolidation loans might seem like a one-stop solution for clearing multiple debts, but the reality is often different. While credit providers may request settlement letters for smaller debts, they won’t handle paying off those debts on your behalf. Moreover, if you’re burdened with a heavy debt load, getting approved for a consolidation loan can be an uphill battle. This is largely due to the high risk associated with these loans.
Credit providers conduct a thorough affordability assessment, scrutinising your income, expenses, and existing debts to determine your eligibility for a consolidation loan. On top of this, risk factors such as credit score will be looked at. Understanding these factors can help you make informed decisions about your financial future.
What Is The Benefit Of A Consolidation Loan?
A consolidation loan offers consumers a lifeline by granting them the opportunity to repay their smaller debts effectively. This can bring much-needed financial relief and alleviate the burden of high-interest debts like payday loans.
Beyond the immediate relief, consolidation loans provide an excellent way to streamline debt management and maintain better financial control. Instead of juggling multiple loans and credit cards, you’ll only have one simple monthly payment to make. Typically, this consolidated amount is more affordable, and the extended repayment period makes it easier to manage.
What Are The Downsides Of A Consolidation Loan?
Debt consolidation loans come with high interest rates. This is due to the risky nature of these loans. This results in paying back a much larger amount than was borrowed, especially because the duration of these loans is long. Another downside is the strict qualification criteria of a consolidation loan. Those that often need them the most, are unable to qualify due to their risk rating.
What Is Debt Counselling?
Debt counselling takes a similar approach to consolidation loans but with a different twist. Through a registered debt counsellor, they can renegotiate with an individual’s credit providers to achieve reduced monthly instalments and interest rates, creating a more affordable and manageable payment plan. This transformative process lightens the burden of debt, freeing up the possibility to allocate remaining funds towards expenses or savings.
The magic of debt counselling lies in consolidating all your accounts into one convenient monthly instalment. This simplifies your financial life as the consumer only needs to make a single payment each month. The expertly managed instalment is then distributed to the credit providers based on the new negotiated terms, offering a clear path to financial freedom. Much like the consolidation loan, with the extended term, the consumer can also be debt free after 36-60 months.
What Is The Benefit Of Debt Counselling?
As a form of rehabilitation, debt counselling is a powerful solution. While benefiting from a structured repayment plan, consumers need to be aware that applying for new lines of credit becomes temporarily restricted. Debt counselling places a flag on the credit report with the credit bureaus to ensure that consumers focus on repaying existing debt without accumulating new debt. In addition, the new, lower debt repayment means that additional credit is no longer needed.
This break from obtaining new credit provides consumers with an opportunity to reflect on their credit usage patterns and potentially reduce reliance on credit in the future. As the debt counselling process progresses and monthly obligations are met diligently, credit scores gradually improve. Over time, this commitment to meeting financial responsibilities helps rebuild a healthier credit standing, paving the way for a brighter financial future.
Which Option Is Best For You?
Choosing between these two debt consolidation options can be daunting. However, depending on your situation, it may be quite obvious which you would qualify for and which would provide the most relief. Typically, those that are deemed over-indebted, i.e. their income is not sufficient to cover their debts and living expenses, require more assistance than those just struggling with temporary cash flow issues. The former would probably benefit more from debt counselling, while the latter may take advantage of the consolidation loan option.
In order to determine which route you should go, it is advised to speak to a debt professional. A debt counsellor can assist you with an assessment which looks into your debts, budget and credit profile. Based on these, as well as your personal financial goals, they will be able to advise accordingly.