The pros and cons of consolidating your debt

For most South Africans, there comes a time when they need financial assistance. This is either to purchase a house, pay off medical debt, student loans, a car or consumable items with store accounts and credit cards. And, while having a line of credit can have its benefits, such as affording you the things you want and need in manageable instalments and improving your credit score, when not used wisely, it can affect your finances negatively. It can leave you with a lot of debt that isn’t payable with your salary. This leaves people feeling frustrated and stressed when they can’t find a way out.  This then leaves the question of whether consolidating your debt with a personal loan is a good idea? This article will discuss debt consolidation and the pros and cons of debt consolidation in South Africa.

What is debt consolidation? 

Debt consolidation is when you apply for a personal bank loan to consolidate your debt. This loan helps you pay off your existing debts, and depending on the loan amount you receive; you can combine two or more debts into one single payment per month. This step is usually taken by customers under major financial strain looking for a way to pay off their debt in a more stress-free and manageable way.

The pros of consolidating debt 

Debt consolidation loans are usually the most beneficial way for someone to get out of debt. Read below for detailed reasons:

Turn multiple payments into one 

One of the reasons why people decide to consolidate their debt is to simplify their budget. When you have many accounts and bills to pay, creating a monthly budget can cause anxiety. This is because you see your money being pulled in different directions. Depending on the severity of someone’s situation, some people are either left with no money to spend on anything other than their expenses, or their salary cannot pay for everything, and they have to neglect some payments.

This impacts you badly as creditors expect you to pay your accounts every month without fail. Consolidating your debts can help simplify your debt repayment process because it will be one payment per month. Depending on your loan and repayment terms, you can qualify for a personal loan with a lower monthly payment rate, which will give you more leeway with your money within a month. This is ideal for people with multiple credit card balances and store accounts because you can pay all of them off and repay one creditor per month. This puts you at ease as you now only focus on “one debt”.

Lower interest rates 

Another pro of applying for a personal loan online to consolidate your debt is that you can potentially get a lower interest rate. Credit cards and store accounts usually have a higher interest rate than a personal loan. By moving to a single monthly payment, you can cut the interest rate cost, save more money and focus on repaying your debts faster. This is a great way to save money and ensure you aren’t throwing too much money towards interest rates and instead work on tackling your debt balances.

Improve your credit score 

When you find yourself in a financial rut, it doesn’t only affect your day to day life but also your credit score. Whether you pay your debt every month or miss payments due to the amount of debt you have versus your income, you are still affecting your credit score. This is because credit bureaus look at your credit history and how much credit you have been using. This can show creditors and the credit bureau that you rely on your credit which doesn’t serve you well. When you apply for a loan and move your debts into a single payment, you can improve your credit score as your credit utilisation is low, ultimately boosting your credit score.

The cons of debt consolidation

While there are benefits to having a single loan, you always need to consider the cons before submitting your loan application.

It doesn’t solve your debt issue 

While a consolidation loan can help you pay off your debt and allow you to have one monthly repayment, it doesn’t solve your debt issue. It simply gets you out of debt. You need to look at how you use money and what you have been doing wrong in the past. Ask yourself:

• Are you reliant on your credit cards to get by? 
• Are you living a lifestyle you can’t afford?
• Are you struggling to stick to your budget, don’t know how to save or is your salary too low for your needs?

By understanding why you got into this situation, you can work towards ensuring you make better decisions in the future that will ensure you don’t go back to where you are now.

You may encounter additional fees 

With a consolidation loan, you may get a lower interest rate but high costs. Those costs can be for the protection plan, annual fees and more. It’s important to do your research before you apply online for your loan. Use a personal loan calculator and see what an estimated cost of it all would be. This will ensure that you know what you are getting yourself into. The last thing you want to do is accept a loan offer only to find out that it puts you in an even worse position than before.

Higher interest rate 

While lower interest rates are possible, things can also go the other way, depending on your current interest rates and credit score. When applying for a personal loan, you can potentially end up with a higher interest rate than you currently have. While there are many reasons for this, and it depends on the creditor and their guidelines, it can be because your current credit score is bad.

Lenders still need to vet you to see if you are a high or low-risk borrower, and if they see that you have a questionable payment history, you will get a higher interest rate. You need to ask yourself whether paying a higher interest rate but having one instalment to manage for 12 months or a couple of years is better, or would you prefer to find a debt repayment method that doesn’t require you to take out more debt and pay more interest?

Is consolidating your debt a good idea? 

Debt consolidation can be an effective way to cut down the stress and anxiety of finances and encourage feeling in control. It helps put things into perspective and simplify your life. However, if you don’t do proper research prior and understand your financial situation and how you got into these habits, it may not benefit you. Consolidating your debt is supposed to help you and not put you into more debt. So, before applying for a personal loan, do your research and be honest with yourself about the best solution for you.