When to take out a debt consolidation loan
Shirley Smith
Nobody plans to take on unmanageable debt, because nobody wants to be burdened with late payment charges and increasingly high interest rates.
But life doesn’t always follow the script.
For people who find themselves heavily in debt – either because they’ve lost income or because they’ve had to cover an unexpected expense – there’s a financial product to ease the burden: the debt consolidation loan.
First a word of warning: debt consolidation loans can be used both wisely and unwisely.
If you take one out, remember that you’re doing so to get yourself out of debt – not increase your spending power.
There’s little point to getting yourself out of the red with a debt consolidation loan, only to accrue more unmanageable debt.
However, there are many real advantages to a debt consolidation loan when it is used sensibly.
Make repayments easier
It can be difficult to keep track of multiple loans, and if you have several credit accounts – credit cards, store accounts, and personal loans – you’re probably paying more fees than you really need to.
A debt consolidation loan can solve both problems by pulling all your debt into a single loan.
This reduces the amount of fees you pay and makes repayment a lot simpler.
With one debit order for all your debt, you know exactly how much will come off every month.
Lower your monthly instalments
If you have significant debt and are struggling to make minimum payments, a debt consolidation loan can give you some breathing room by extending the term of your debt and lowering your monthly instalments.
But this comes at a price. A longer loan term also means that you accrue more interest over the life of the loan. For this reason, your aim should always be to pay off your debt as quickly as possible even if you use a debt consolidation loan to make monthly repayments more affordable.
Once you’ve taken care of your many debts with a debt consolidation loan, you still need to work on reducing your debt (now in the form of your consolidation loan) as quickly as possible.
That means examining your spending habits and looking for areas where you can save.
Shirley Smith is COO at Old Mutual Finance.
This was first published on Old Mutual Finance’s blog.