CONSIDER DEBT CONSOLIDATION BUT UNDERSTAND THE BENEFITS AND PITFALLS

With the lockdown period having significant ramifications on personal finances, many consumers are asking about available options to assist in better managing their money. One option is debt consolidation, which in the right circumstances can improve current cash flows and save costs.

According to Tessa Verwoerdt, HOD: Money Solutions at Bayport Financial Services, debt consolidation involves taking multiple outstanding loans and combining them into one new loan with only one monthly repayment. “This means that you can avoid having to pay several instalments to multiple creditors, each with their own associated costs. Instead you pay back only one instalment on one loan. You do however need to consider what the total cost of this loan over the entire period will be.”

She unpacks what consolidation means:

“The idea behind consolidation is to reduce the number of creditors you need to pay on a monthly basis, making it easier to manage your debt repayments.  Debt consolidation generally will not include your secured loans like your car or bond loans. It will apply to unsecured debt like a credit card, personal bank loans, lines of credit, and other debts like medical bills, especially when they have mounted up.”

“During difficult economic times, and especially as thousands of consumers will be faced with cash flow challenges and forced to tighten their belts even further as a result of the lockdown, debt consolidation can be a solution for those who have trouble keeping up with their monthly payments. This solution is especially relevant where you have one or more loans in arrears. Your debt consolidation service provider can negotiate settlement discounts with your existing creditors thereby reducing your overall debt burden and improving your credit profile on the bureaus.”

The consolidated loan should have a lower monthly repayment compared to your existing creditor repayments.

Verwoerdt cautions that it’s important to check the interest rate and cost of the new loan to ensure that it is lower than what you were previously paying.  It is also important to understand the effect of a longer term of the new loan as you may end up paying more interest over the life of the loan.

She says on arrears debt, you can negotiate settlement discounts that will help you to reduce your overall debt exposure before consolidation. This will reduce the term or instalments of the consolidation loan significantly and will help you save on additional arrears interest and costs that increase your debt balances, making it more difficult to pay off a debt or keep up with payments.

However, after consolidating your debt it’s critical that you don’t continue to build up debt on your credit cards, and other accounts that you included in the consolidation. The best course of action is to close the accounts and cut up the credit cards.  Furthermore, it is important to be disciplined with your financial behaviour and resist the temptation to borrow again if you are unable to afford additional debt.  Remember that creditors will see this as opportunity to market to you again after your debt has been consolidated or your loans have been settled with them.

In time, well-managed debt consolidation can also help to improve your credit score which will enable you to obtain better credit terms in the future.  In this regard it is important for you to obtain paid up letters or statements from creditors and debt handed over to debt collection agencies, which have been settled via the new consolidation loan to ensure that the debt is paid up and no additional costs continue to mount up, and that the bureaus are updated accordingly.

Verwoerdt concludes by encouraging consumers to check their credit health reports to know where they stand and to seek out help from registered and trusted financial institutions when faced with challenges.