Why you shouldn't take out a debt consolidation loan

"In my experience, a debt consolidation loan is a BandAid, and merely postpones the inevitable. Debt counselling is a resolution of the debt problem, and allows you to maintain your credit record and your assets." - Founder & CEO of Meerkat, David O'Brien 

What is a debt consolidation loan?

Debt consolidation refers to consolidating (making multiple things, one). In the case of a debt consolidation loan, it's one larger loan that allows you to combine multiple debts. This means that instead of having multiple debts to pay, you now only have one payment to make. If you have multiple credit cards and personal loans for debt, this may seem like a good idea.

This benefits of a consolidation loan are:

• It can help simplify the payments of your debt by only making one payment.
• It could also potentially lower the overall interest rate.

Before taking out a debt consolidation loan, know that it may only offer temporary relief. 

Debt counselling, on the other hand, focuses on creating a sustainable plan to manage and get rid of debt completely. Debt counselling also ensures that you keep your home and your car AND it's a way of eventually improving your credit score.

How does a debt consolidation loan work in South Africa?

As with other loans, to get a debt consolidation loan you will need to first apply for it from a financial lender. To get approved, they will look at your credit history, payment habits, credit score, and ability to afford payments.

If you have a low credit score, the loan may not be approved for you. If you are, this could mean higher interest rates on the loan and you could end up paying more for your debt in the long-run. 

Can consolidation hurt your credit score?

Applying for many debt consolidation loans can hurt your credit score, just like applying for a personal loan. When you apply for credit, a credit check is done. If you get rejected a lot in a short time, it can make creditors worried and may lower your credit score. Also, if you don't make timely monthly payments on your loan, this can also harm your credit score.

Main reasons to get a debt consolidation loan:

While debt consolidation loans may not be suitable for everyone, there are certain situations where opting for a consolidation loan can be beneficial.

1. If you have multiple debts with high-interest rates: By consolidating these debts into a single loan with a lower interest rate, you can potentially save money on interest payments and pay off your debt faster.

Moku Tip: It's very important to note that only if you have a lower interest rate on your new loan can this be achieved.

2. If you are struggling to keep track of multiple payments and due dates: A consolidation loan can make the repayment process easier for you by combining all your debts into one manageable monthly payment. This can help reduce the risk of missing payments and incurring late fees or penalties.

Did you know: a missed or late payment can stay on your credit report for up to 7 years.

3. If you are committed to changing your spending habits and are determined to become debt-free: A debt consolidation loan can serve as a tool to help you achieve your financial goals. By consolidating your debts and creating a structured repayment plan, you can take control of your finances and work towards a debt-free future.

Main reasons to not get a consolidation loan:

1. If you have a low credit score: If your credit score is already low, getting a consolidation loan may not be the best option for you. Lenders may offer you higher interest rates, making it more difficult for you to pay off your debt.

2. If you have a small amount of debt: If you only have a small amount of debt, it may not be worth it to take out a consolidation loan. The fees and interest rates associated with the loan could end up costing you more in the long run.

3. If you have a history of missing payments: If you have a history of missing payments on your current debts, getting a consolidation loan may not solve your financial problems. It is important to address the root cause of your financial difficulties before taking on more debt.

4. If you are not committed to changing your spending habits: Consolidating your debt can provide temporary relief, but it is important to address the underlying issues that led to your debt in the first place. If you are not committed to changing your spending habits, a consolidation loan may not be the best solution for you.

5.If you want a real, long-term solution to stay out of debt: If you are looking for a long-term solution to getting out of debt, creating more debt with another loan is not the solution. Debt counselling is.

What is debt counselling in South Africa?

Debt counselling in South Africa is a programme to help South Africans get out of debt without the need to take out another loan. It involves working with a qualified Debt Counsellor who will assess your financial situation and create a debt repayment plan unique to your specific financial situation. This is done by negotiating with your creditors to reduce the interest rate on your loans.

Debt counselling, and the fees involved with this process, is regulated by The National Credit Regulator.

How does debt counselling work?

Debt counselling works by first conducting a thorough assessment of your financial situation. A qualified Debt Counsellor will review your income, expenses, debts, and assets to gain a complete understanding of your financial health. Based on this assessment, a personalised debt repayment plan will be created, taking into account your unique circumstances.

Once the debt repayment plan is in place, the Debt Counsellor will then negotiate with your creditors on your behalf. By working with your creditors, the Debt Counsellor aims to reduce your interest rate on your loans, making it easier for you to manage and ultimately pay off your debt.

Throughout the debt counselling process, you will make a single affordable monthly payment towards your consolidated debt. This payment is distributed to your creditors as per the agreed-upon plan. By consolidating your debts into one manageable payment without taking out a loan, you can avoid further damaging your credit score and eliminate the stress of juggling multiple payments.

Benefits of debt counselling

Through debt counselling, you can consolidate your debt into a single affordable monthly payment, avoid further damaging your credit score, and ultimately regain control of your finances. With debt counselling, you can break free from the cycle of debt and work towards a brighter financial future.

Is a debt consolidation loan a good idea?

In summary, when considering whether a debt consolidation loan is a good idea for you, it's essential to weigh the pros and cons based on your individual financial situation.

While a consolidation loan can provide temporary relief by simplifying the repayment process and potentially lowering interest rates, it may not address the root cause of your debt. If you have a low credit score, a small amount of debt, a history of missing payments, or are not committed to changing your spending habits, a consolidation loan may not be the best solution for you.

On the other hand, if you have multiple debts with high-interest rates, struggle to keep track of multiple payments, and are determined to become debt-free by changing your financial habits, a debt consolidation loan could be beneficial. However, if you have bad credit or have been 'blacklisted', debt counselling may be a more suitable option to manage and eliminate your debt without taking out another loan.

Ultimately, the decision to pursue a debt consolidation loan should be made after careful consideration of your financial goals and circumstances. It's important to explore all available options, including debt counselling, to choose the best path towards achieving financial stability and freedom.

It's also very important to note that if you are already struggling to keep up with your monthly debt repayments, you are in a position where you are probably more suited for debt counselling.

Debt counselling offers a more permanent solution to consolidating your debt without having to take out another loan. At Meerkat, our debt counselling clients often reduce their monthly debt repayment by up to 50%, giving them immediate relief!

Not sure that either of these are good methods? Why not read up about other debt management strategies in this blog post including the debt snowball method and the debt avalanche method.

Who is Meerkat?

Meerkat is dedicated to enhancing the financial well-being of South African consumers by empowering them to make the most of their money. Our services include debt repayment negotiations, access to affordable insurance, and support in kickstarting an emergency fund.

Simply complete the contact form on our website to connect with the Meerkat team and receive a complimentary callback today.