Myths about Debt Consolidation – Are they True?
There is a way to get on top of your repayments and credit that is by consolidating debt. There are credit companies that will help you in the consolidation of your debt, by offering you a loan to repay all of your debts in one go by means of consolidation and then paying off one loan. Your financial consultant will usually look out for a loan that has relatively small repayments so you can get on top of your debt with cash to live with. Consolidation of debt is a common way for people to sort out their finances and usually the easiest way too. Consolidation debt may not be for you if you have consolidated your debts a number of times in the past. Your consolidation debt includes the debt from your previous consolidation or is you want to move debt off your credit cards and store cards to start using them again.
Myths about Debt Consolidation
If your debt is impacting your finances, you may fall under the 75% of households that spend 72% of their available disposable income on debt repayments. This is according to the South African Reserve Bank bulletin. This is a troubling statistic where consumers contribute 60% to the economy.
Applying for a debt consolidation loan is one of the most sought-after products these days and the purpose of this loan is to consolidate all debts. This is a well-known process which makes things so much easier in your life by consolidating many credit agreements into one manageable instalment and may assist you to get out of the dreaded ‘Debt Trap’ much quicker.
In South Africa and around the world there are certain misconceptions about using a loan to pay for your current debt. We all heard the famous saying – “Don’t use a loan to pay off another loan as it will get you deeper into debt”.
We will discuss the common myths about debt consolidation and ideas on how they work.
Myth: Debt consolidation decreases debt
In most cases, debt consolidation does not reduce debt. What it does is relieve your monthly debt repayments to creditors and relieves the pressure of using an average of 72% of your disposable income on your debt.
Myth: With a debt consolidation facility you will save on interest
If you have an excellent credit score you might qualify for a consolidation loan at a very low-interest rate, but this is not the case in most instances.
So let’s look at a simple example –
The interest rate on one of your credit cards will be around 20.25%. On the very same credit card, your outstanding balance is R1 000. If you don’t spend money on the credit card your monthly repayment will be about R176.65 per month.
If you consolidate and include the above-mentioned credit card into a debt consolidation loan with a typical 5-year repayment period at 27.75%, your new monthly payment gets reduced to R105 per month, which is a reduction of R71.65 per month. Your total repayment on the credit card increases over the specified period due to increased interest rate and an extended repayment period.
The monthly repayments are significantly lower, which will improve your monthly affordability. Getting this type of benefit you will pay extra in the long run with a more expensive credit card, for example.
Myth: It will hurt your Credit Score
As you will be increasing your monthly disposable income and you will be settling all your current debts, your credit score will increase with each account that gets settled through the debt consolidation. Read more about credit scores
Myth: Debt consolidation is an expensive loan
Normal debt consolidation will attract an interest rate of between 10.25% and 27.75% per year. The interest rates credit providers will offer vary according to your credit score. The higher your credit score is the lower the interest rate you will receive. If you are a high-risk consumer with a low credit score, then you will receive an offer of 27.75% or the loan might even get declined. Myth:
Myth: The process of applying for a Debt consolidation loan is tedious
With all the technological advances in the past 10 years, credit providers have made the process of applying for debt consolidation quick and easy with a simple online application or you may even apply via your cell phone. These call centers will have voice recordings which will act as a legal binding credit application.
Once you have sent in all the necessary supporting documents the entire process may take between a couple of days to a week to finalize. Debt consolidation using your fixed assets as security, like your house, for example, takes much longer but the interest rate will be far less. Preparing all the relevant documents required before applying for the debt consolidation loan will speed the entire process up. Documents usually needed for a debt consolidation loan application are Pay slips, Identity Documents, bank statements and proof of residence.
Our service
Before applying for a debt consolidation product let us improve your credit scores with our Credit Salvage Credit Clearance product. If you get declined due to affordability our Credit Salvage Debt Counselling and Debt Review products will be the answer to getting you out of debt.