How can debt consolidation go wrong?
People who tend to apply for debt consolidation loans are either financially over extended or are heading that way. Many view it as ‘saving grace’ to their financial dilemmas, but debt consolidation has the potential to go wrong too. We look at what can happen if you don’t choose a reputable provider or if you borrow after entering into debt consolidation.
Choosing a provider
“It is important to ensure that the credit provider you choose is a trusted financial institution and registered with an appropriate body such as the National Credit Regulator (NCR). If a credit provider is offering you a consolidation loan with a higher interest rate that results in higher monthly repayments, this is a red flag, as you should be aiming to take out a consolidation loan with a lower interest rate thus reducing your monthly debt repayments,” stated DebtBusters.
On the other hand, if a credit provider offers you a consolidation loan that sounds too good to be true (such as promising to get a high portion of your outstanding debt written off), or the credit provider requires you to do something that is either illegal or damaging to you, such as requiring you to default voluntarily on your obligations and instead send the money straight to them, this is a definitive red flag and you are probably dealing with a scam.
Another clear red flag, DebtBusters added, is if a credit provider requires you to send any money without a prior written agreement.
What can happen should you choose the incorrect provider?
If you choose a credit provider that offers you a debt consolidation loan with a higher interest rate, and it results in a higher monthly debt repayment than the repayments you were originally paying, you will end up paying more in interest fees over the term of the consolidation loan.
“If you feel you have fallen victim to a scam or have experienced unethical behaviour from a credit provider, you can report this to Easycomeeasygo.co.za, a South African Reserve Bank initiative for reporting advance-fee scams, or to a relevant body such as the NCR,” stated DebtBusters.
Should you borrow after debt consolidation?
The short answer is no.
“You should avoid taking out any additional credit after you have taken out a consolidation loan as this puts you at risk of ending up in the same situation you were in when you decided you needed a consolidation loan. Further, the cash flow that your consolidation loan has freed up could end up going to the new loan and lead you into financial difficulty again. In short, additional credit could cancel out the benefits you receive from a consolidation loan,” DebtBusters explained.
It is also advisable to consult a trusted financial advisor before making big decisions for your financial future. When it comes to debt consolidation, making sure that this is the best option for you, will save you in the long run.