You don’t need a debt consolidation loan, you need debt counselling
Is it a good idea to consolidate your debts?
First, let’s look at what it means to consolidate your debts. To consolidate your debts means you are taking all your smaller loans like credit card debt, and making it one larger debt.
Before we can look at whether or not it’s a good idea we have to look at the different methods of debt consolidation.
Debt consolidation can happen in two ways:
- Debt consolidation loan
- Debt counselling (debt review)
Debt consolidation loan
A debt consolidation loan is a way of consolidating your debt by taking out one larger loan and consolidating all your smaller loans.
Does consolidation hurt your credit?
A debt consolidation loan, like a personal loan, can hurt your credit if you apply for a consolidation loan at many credit lenders (banks) and you get rejected. The reason for this is that any time you apply for credit, an inquiry is made into your profile. If you’ve been rejected several times in a short period, you will be seen as a red flag with creditors and this could negatively affect your credit score.
It could also negatively affect your credit score if you are unable to make your monthly payments for your loan on time each month.
Can I get a loan to consolidate my debts?
If you have a good credit score and good affordability, you will probably be able to get a consolidation loan.
Can I save money by consolidating my debt?
If you opt for a consolidation loan you may end up paying a higher interest rate meaning you will pay more for your debt overall. However, if you are over-indebted, debt counselling will be the best way to go. You will definitely save on your monthly instalments as well as benefit from a reduction in the interest rates on your loans.
What credit score do you need for a consolidation loan?
The downside of getting a consolidation loan is that you would need a good credit score and banks will check your risk profile to determine if you can actually afford the loan. Even if you do get approved for the loan, you may be approved with a higher interest rate depending on your risk profile and your ability to pay the loan back.
Debt counselling (debt review)
Debt counselling is also a way of consolidating your debt with the aim of paying it off. Like a consolidation loan, you only pay one monthly instalment. However, the big benefit of debt review is that you do not have to take out another loan to consolidate your debt. This means that you do not need a good credit score.
How does debt counselling work in South Africa?
A Debt Counsellor will first assess if you are over-indebted. They do this by performing a financial assessment that’s based on your income and expenses. Only if you are found to be over-indebted, can you undergo the process.
If you are found to be over-indebted, the Debt Counsellor will put together an affordable repayment plan that takes into account your daily living expenses. You shouldn’t have to choose between eating and buying electricity!
The reason they can put together this plan is because they negotiate with your creditors on your behalf to reduce the interest rate on your loans, which means that you could end up saving money on your total debt amount!
In addition to this, this repayment plan gets taken to court which means if you have assets like a home or car, they will be legally protected by this court order.
“In my experience debt consolidation is a BandAid, and merely defers 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
@mokumeerkat Ever wondered about the difference between a #debtconsolidationloan and #debtreview? As with any loan application, a credit lender will first check your affordability as well as your credit score, to see if you can afford to repay the loan. #debtconsolidationloan #debtconsolidation #debtreview #debtrelief #debtfreejourney ♬ original sound - Moku | Do more with your money
Benefits of a debt consolidation loan
- If you get approved for the loan with a lower interest rate, you could end up saving money on your capital debt amount.
- One loan, means fewer loan repayments which can free up time and just improves efficiency.
- You will be able to apply for more credit. However, you have to be disciplined enough to not continue digging yourself into a deeper hole of debt that you eventually won't be able to get out of.
Benefits of a debt review
- Lower interest rates because of negotiation with creditors, which could end up saving you on your capital debt amount.
- Lower monthly debt instalment, freeing up money for your daily living expenses.
- Legal protection of your house and your car.
- With Meerkat, the opportunity of saving towards an emergency fund so that you no longer have to be as reliant on debt to get you out of a sticky situation.
If you want a sustainable way to take control of your finances and become debt-free, you should opt for debt counselling. You won't have access to credit during the process, but this is temporary, and you won't need it! Debt counselling will take your daily living expenses into account with your new repayment plan.
The difficult truth is: you can't get rid of debt by creating more debt.