Managing your debt can leave you in a tricky situation and landing in financial trouble. Debt consolidation is often an option offered to those struggling to make repayments. But is it really the best way to manage your debt?

According to Debtbusters, the short answer is yes.

“Debt consolidation is an effective method of debt re-financing, which involves taking out one loan to settle many others. It is a viable financial solution designed to simplify multiple debt repayments and, under some circumstances, save you money. The process involves taking out a single, new loan, at the lowest possible interest rate, to pay off multiple smaller debts,” states Debtbusters.

What are the advantages of debt consolidation?

  • You only have one payment at the end of the month as opposed to juggling multiple creditors.
  • Your monthly instalment is typically less than the total instalments of the consolidated debt put together.
  • You can pay off those accounts which might have potentially caused you to tarnish your credit score.

What are the disadvantages of debt consolidation?

According to Debtbusters, the following are disadvantages of debt consolidation:

  • Although you might save in the short term because of reduced interest rates, consolidation loans normally stretch over longer periods of time so you might end up paying more towards your debt in the long term.
  • Consolidating your debt can potentially open doors for more poor spending habits. Paying off your debt can give you a false sense of financial freedom, but those credit cards or over drafts will still be available to use and this might cause you to fall into a worse debt situation.
  • Your debts do not reduce when you consolidate them, you only replace one or many debts with another one. Which will not be a good idea for over-indebted consumers.

The debt consolidation process and requirements

“The minimum requirements for debt consolidation, applicants must show a clear credit record and no arrears on repayments,” added Debtbusters.

When applying for a consolidation loan, you will need to provide the following documents or information:

• 3 months non-internet stamped bank statements

• 3 months’ pay slips and a contact person and number for your HR division.

• A copy of green bar-coded Identity book or ID card

• Proof of residence

• Details of your next of kin (name, address, contact no.)

• A settlement letter of your latest existing loan accounts to be settled (maximum 5 accounts to be settled)

What happens when you apply?

  • A consultant will check documentation for accuracy
  • A credit check will be done
  • Your repayments to monthly income will be calculated
  • A valuation of your property will be done
  • The application will be forwarded to the banks for approval

Until next time,
The Team