Debt consolidation considerations

Type the words ‘debt consolidation’ into Google and the chances are good you’ll get a lot of contradictory information, from links suggesting it is the root of all financial evil to ads that claim it is the solution to all your money problems.

However, it is not as simple as either the critics or supporters suggest.

According to Shafeeqah Isaacs, the head of consumer education at financial services provider DirectAxis, debt consolidation isn’t for everyone, but may be a useful tool to get your financial affairs under control, particularly if you’re feeling stressed about dealing with a complicated financial situation in uncertain times.

“Before busting some of the myths about debt consolidation, a good place to start is understanding what it is,” Isaacs said.

“The simplest explanation is that it involves taking out one loan in order to pay off a number of smaller debts.

“Typically, you would take out a longer-term loan to pay off a range of debts such as loans, credit cards or store cards.”

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Critics argue that the only real advantage of doing this is that rather than having a whole lot of smaller creditors to manage, you have one large one.

Isaacs explained that while this is true there could be some other benefits too.

“Consolidation loans usually have fixed interest rates so it’s easier to budget and manage your financial affairs,” Isaacs said.

“Having only one loan to repay also means you’re less likely to miss payments, something that could impact your credit rating.

“Consolidating your debt can also save you money on service fees and credit life cover costs.

“Depending on how the consolidation loan is structured it could also improve your cash flow by requiring smaller payments, over a longer period.

“Although you do need to bear in mind that you will be paying interest over a longer term too.”

Isaacs went on to explain that if you do find yourself in the fortunate situation where the loan frees up some additional cash each month that you should either use the extra money to repay your loan faster or spend it wisely if you do not decide to put it in a savings or investment account.

“Another myth is the perception that debt consolidation is only for people who aren’t able to manage their money properly,” Isaacs said.

“This simply isn’t true.

“Consolidating your debt is a financial tool that’s used by businesses and many financially savvy people to simplify their financial affairs, save on certain costs and free up cash.”

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Contact the newsroom by emailing: Melissa Hart (Editor) germistoncitynews@caxton.co.za, Leigh Hodgson (News Editor) leighh@caxton.co.za or Busi Vilakazi (Journalist) busiv@caxton.co.za.

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