Why are an increasing amount of people looking to consolidate their debt via debt consolidation loans? Well, rising inflation rates coupled with extremely poor spending and saving habits have given rise to a serious debt problem throughout South Africa. For many, these loans represent the last realistic opportunity they will have to claw their way […]
In simplest terms, debt consolidation involves rolling several outstanding balances into one account for easier repayment. Ideally, the new account has a lower or even a 0% interest rate. One of the most common types of consolidation entails moving a few high-interest credit card balances to a single credit card with an introductory waiver of any interest charges. Provided the borrower pays the balance in full before the introductory rate expires, he or she will save a noticeable sum on the interest and become debt-free in a shorter time frame.
Another form of debt consolidation can apply to personal loans or home equity lines of credit. In most cases, a bank or other type of lender grants a borrower a consolidation loan to use for outstanding debt repayment. A mortgage consolidation loan puts a borrower’s home or other property up as collateral, which does carry a higher risk in case of default on payments.
The Basic Process of Debt Consolidation
A first step to consolidation is a meeting with a knowledgeable financial advisor or credit counselor. Clients are expected to bring records of all outstanding debts they wish to consolidate, including their most recent statements from their credit card companies or other lenders. During this initial meeting, the debt counselor will examine each individual’s financial situation and make recommendations in terms of using property as collateral or exploring alternate forms of consolidation.
Just as with other types of loans, a debt consolidation loan application normally requires a detailed credit history check. This step may reduce an applicant’s score by a few points, but a more important factor for approval is the ability to repay the full amount in a given time frame. Many consolidation loan applicants will be required to provide proof of monthly income as a basis for final approval.
Who is a Good Candidate for Debt Consolidation?
The best candidates are those with certainty that they will not miss any repayments according to the agreed-upon terms of a consolidation loan. Debt counselors do their best to help each borrower work out an achievable payment schedule and minimum payment amount, but the follow-through is ultimately up to the individual who agrees to the consolidation loan terms. Provided a borrower can pay off the entire consolidated balance by the deadline, he or she can take a significant step towards becoming debt-free. To determine ability to make these repayments, anyone considering this form of debt relief is strongly encouraged to make a detailed monthly budget of all expenses and necessities versus non-essential spending.
Frequent Misconceptions about Debt Consolidation
Plenty of information is available about debt consolidation from numerous sources, and not all of them may be accurate or objective. One common myth is that a consolidation loan does not come with additional fees, but the vast majority of lenders do charge a certain percentage of the total amount owed to a client’s creditors. Lending companies that promise no upfront fees are best avoided because this is a possible sign of deceptive business practices.
Another common myth about debt consolidation concerns room for the borrower to negotiate payment schedules, minimum payment amounts and even interest rates. Some lenders do not advertise this option, but it is still within each loan applicant’s rights. For this reason, it is worth each borrower’s while to research all possible terms he or she qualifies for based on individual financial situations.
Seeking Advice Concerning Debt Consolidation
A reputable credit counseling service is a good place to start exploring options for consolidation. Credit counselors can be invaluable sources of information about steps to take towards a better financial future. Along with debt consolidation recommendations, a qualified counselor can also make suggestions for eliminating unnecessary spending, making a reasonable household budget and negotiating repayment terms with creditors.
Debt consolidation has multiple advantages, namely one lower monthly minimum payment instead of several repayments to different creditors. Smaller interest percentages are also strong selling points of a consolidation loan. Terms of a consolidation plan vary according to each borrower’s total amounts owed and overall credit rating, so anyone considering this debt relief option is urged to seek a financial advisor’s assistance.
Debt Consolidation FAQ's
Consolidating that Debt? Here’s Some frequently asked questions about Debt Help. Please always contact a financial advisor before making any serious financial decisions.
Life could be easier if one is debt-free. Is there such a state of existence? Then came consolidated debts which offered the oasis for the thirsty in the desert of intense interest payments. This is not the time to shout for joy right away. Consider all the angles before jumping in the bandwagon. If your questions are answered, would you start on one today?
How to know when consolidation is a bad idea?
One must look at the root of the problem as to why debt was incurred in the first place. If this is not addressed, consolidating debt might just be a stop gap approach to a bloating problem but might pop again. There may also be a false sense of security born out of complacency once the root of the problem has been found. Last but could be sand trap, people sometimes over borrow more than necessary to pay for the consolidated loans. Your home might be at risk which is most often used as the security to take out the loan. Make sure that you could afford the interest rate that you have to pay.
What is a consolidation loan?
It is the transfer of all the money you owe into one lump sum amount to be paid in manageable monthly repayments.
Is it a good idea?
It can simplify the management of one’s debts but this is after all still a debt and will require self-discipline to be able to work well in the end.
How does it work?
When you have various debts left and right that are beginning to become a headache to manage, that’s where Debt Consolidation can come in. A new debt is obtained with a reduced interest rate. This is easier on the pocket and can be paid back on time. The only loans that can be consolidated though are unsecured loans.
How to consolidate debt?
You will take out one loan for your unsecured loans at a lower interest rate so that only one loan is serviced. This will involve using a collateral (usually a house) as a security for the new loan. A fixed interest rate is secured making it more manageable to pay the loan in a timely manner.
How to acquire consolidation loans?
Make a sum of all your unsecured loans. You can then check their interest rates. Compare the rates of lenders who offer consolidation loans. After determining which offer the best rates, you can submit all the requirements and loan application. Have your equity ready. Complete the procedure and wait for your loan to be approved.
How to consolidate student loans?
First, gather information about all your student loans. Contact all those lenders who loaned you amounts and ask if the debt can be consolidated. Research your options and do not go with consolidations that have a rate higher than you can afford. Then choose the right lender after making the right comparisons. Then sign the necessary documents and wait for your loan to be approved.
Does debt consolidation hurt my credit rating?
No, I will not hurt your credit rating. It will In fact help your credit standing as credit card companies want you to be able to pay your balances. Be careful however in choosing the right provider because if you do not manage your new debt well, this might be the one to hurt your credit standing.
Is debt consolidation a good thing?
It Is a good thing since it is making something unmanageable before more manageable.
Does debt consolidation ruin your credit?
No, it does not ruin your credit if you manage to pay-off your monthly payments in a timely manner.
What are the pros and cons?
As with anything, there are pros and cons. It is a good thing if you are looking for a simple way of managing your unsecured loans at a lower and more affordable interest rate. It is a bad thing if you do not have the discipline to keep up with this new debt payment. Your home could be at risk.
How popular is debt consolidation?
It is becoming popular especially since unsecured loans are commanding higher interest rates and taking its toll on the income of wage earners. Many people also can come up with the equity necessary for the application process.
After going through all the questions and answers, it is clear that debt consolidation requires a certain mindset. Self-discipline, responsibility, and control are necessary characteristics of someone deciding to avail of this product. Do you have what it takes?
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