It can happen so easily…  You open a Woolies account, get yourself a shiny credit card, buy a new car and spend, spend, spend. Before you know it, things are tough and you have too much month left at the end of your money.  You’re paying back substantial amounts of money every month and you just can’t seem to catch a break.

Until one of your friends suggested consolidating your debt. Hold on, WHAT?  What is debt consolidation and why on earth would you want to do that? Keep reading this easy guide to understanding debt consolidation to find out more.

What it is

Debt consolidation combines all of your unsecured loans into one large loan. In other words, if you wanted to consolidate your debt, you would take out one large new loan that offers better interest rates or smaller monthly instalments (or both), than each of the individual loans that you are currently repaying. This means that you would not need to pay your Woolworths, Truworths, Jet and @Home accounts, as well as your car instalment and your credit card individually,  instead you could just pay one monthly instalment toward your consolidated debt loan.

Why it’s cool

Basically, debt consolidation offers consumers a lifeline since it incorporates all of your debt into one loan that generally has a lower required monthly instalment amount (because the loan is spread out over a longer period) or that has a bit of a lower interest rate than some of your other individual loans may have. Your debt consolidation administrators will negotiate with your creditors on your behalf and arrange favourable payment terms and conditions. This means that you get the assistance and advice of professionals who are there to help you regain healthy finances.

What to watch out for

While there is nothing wrong with looking for help to manage your debt, it is mostly the case that people who apply for debt consolidation are either already financially stressed or are on their way to become financially stressed. It is important to remember that debt consolidation is not a complete remedy to the situation.

It is true that debt consolidation can provide you with some relief as well as a structured repayment plan, but it cannot give you the self-discipline to stick to this plan and manage your finances and loans with more caution in the future. In other words, it is not a wonderful cure, but a band aid to help you heal.

Remember:

  • Consolidating your debt may result in smaller monthly instalments, but it may also be accompanied with a longer loan period, which means you will pay it off for longer and may even pay a lot more this way
  • In order to truly reap the rewards of consolidation, you will need to curb your spending habits greatly in the long term
  • You can consolidate your debt yourself – this way you avoid paying the additional fees associated with getting professional help