If you have multiple debt accounts and are struggling to keep up with your monthly repayments, where do you go from there? Perhaps you’ve considered a debt consolidation loan, but is this the right option for you?

1. What is a debt consolidation loan?

A consolidation loan allows you to combine all your smaller loans into one larger loan amount. This means all your smaller debts, like your credit card debt, store debt, personal loans etc. will now be one large loan amount.

Instead of paying several creditors each month, now you’ll only have to make one repayment each month. By consolidating your debt you’ll be offered a new loan agreement. Creditors will usually extend the repayment terms and reduce interest rates.

Although a consolidation loan simplifies your financial situation, you will end up paying more towards your debt in the long run. A debt consolidation loan doesn’t mean you’ll get rid of all your debt. If you don’t have great money management skills or if you don’t have a financial plan, a debt consolidation loan costs you more in the long run.

Most people end up spending their money recklessly when they take out a consolidation loan. This happens because consumers don’t understand how to manage their money and a consolidation loan doesn’t help with that either.

Is a debt consolidation loan the right option for you?

This depends on your credit score and financial situation.

Consolidation loans may be good for you if:

• Your total debt does not exceed 40% of your gross income (excluding your mortgage)

• Your credit score is good enough to apply for a low-interest consolidation loan.

• You can constantly afford your monthly debt repayments.

• You have a plan that will prevent you from making too much debt again.

A consolidation loan may be bad for you if you have excessive spending habits or if you’re overwhelmed by too much debt. If you struggle to manage your money or if you have poor spending habits, a consolidation loan will cost you more money in the long run.

If your total debt amount is more than half of your income, a consolidation loan is not worth pursuing. There are better financial solutions if you’re looking for financial relief.

2. The best alternative to debt consolidation is Debt Counselling

If you’re struggling to make ends meet, rather than consolidating your debt with a debt consolidation loan, consider debt counselling.

What is debt counselling?

Debt counselling, or debt review, offers financial relief to South African consumers who are struggling to pay off their debt. The debt review process was introduced by the National Credit Act (NCA) in 2007 to prevent consumers from being blacklisted.

Debt review is a perfect solution for consumers who can’t afford all their debt repayments and monthly living expenses. These consumers’ monthly expenses exceed their income, which means they may be over-indebted.

Debt counselling is suitable for you if:

• You have a steady income

• You’re struggling to make ends meet as a result of debt

• You can’t keep up with debt payments and you’re falling further into debt

Why is debt counselling better than a debt consolidation loan?

Although debt consolidation loans offer a simpler way of paying off your debt, they may end up costing you more. If you don’t have the financial discipline to manage your money, a consolidation loan will send you further into debt. Debt counselling may be a better option for you.

If you are struggling to keep up with all your monthly bills, debt counselling could help you regain control of your financial situation and become debt-free. A debt counsellor, like Debt Rescue, can offer you the financial relief you’re looking for.

What are the benefits of debt counselling?

• Legal protection from creditors

• Taking overall communication with your credit providers

• Negotiating reduced payments and interest rates with credit providers

• Restructuring your debts into a single monthly payment

• A budget tailored to your needs

Legal protection from creditors

Living with debt can be extremely stressful, especially if you’re being threatened with legal action by your creditors. Once you’re accepted to undergo debt counselling, you don’t have to worry about being harassed by credit providers as you are protected by the NCA. Your debt counsellor will take over this responsibility and communicate with all your creditors on your behalf.

Negotiating reduced repayments and interest rates with credit providers

Your debt counsellor will renegotiate lower interest rates and extended repayment terms on your behalf. By renegotiating these terms, you’ll be paying a lower monthly debt repayment, freeing up some extra cash for living expenses.

Only pay one single monthly debt repayment

Your debt counsellor will restructure your debt so that you only have to make one single reduced monthly debt repayment. With only one monthly debt repayment, you will find it easier to manage all your monthly financial obligations.

A budget tailored to your needs

As part of the debt review process, you will have to submit your monthly expenses so that your debt counsellor can reallocate your spending needs. Your debt counsellor will provide you with a personalised monthly budgeting plan, that you can use to help you manage your money more efficiently.

Is debt counselling the best solution for you?

Debt Rescue will assess your situation to determine whether you qualify to undergo the debt counselling process. If it is not the best solution for you, we will advise you on other options going forward.

10 signs you may need debt review to help you:

1. You’ve maxed out your overdraft/credit cards.

2. You’ve fallen behind on one or more payments.

3. You don’t have enough money to cover living expenses.

4. You’re failing to save.

5. You don’t have an emergency fund.

6. You’re selling assets to make ends meet.

7. Creditors are calling you to ask about debt payments.

8. You’re taking out payday loans.

9. You’re borrowing from your retirement savings.

10. You’re losing sleep stressing about your finances.

3. Advantages and disadvantages of a debt consolidation loan

Let’s take a look at the advantages and disadvantages of taking out a debt consolidation loan:

Advantages of a debt consolidation loan

Lower monthly instalments

You will be offered a lower monthly instalment; however, this comes at a price. A lower monthly instalment means you’ll be extending your loan over a longer period. You’ll end up paying more in interest than you should. This will cost you a lot of money in the long run.

Easier to keep track of payments

Because you only have to pay one monthly instalment towards debt, it’s easier for you to keep track of your debt repayments and make those payments on time.

Disadvantages of a debt consolidation loan

Pay more on your total interest payments

Unfortunately, although the consolidation loan may promise lower monthly interest rates, you’re most likely going to pay more towards your debt over the entire course of your repayments.

The lower interest rate may relieve you from the stress immediately, but you will be paying a whole lot more over the long term.

High fees

Debt consolidation companies often charge high upfront fees and interest rates. Consumers find it difficult to pay off their debt amounts due to the high interest rates.

Interest rates may rise

If the interest rates on a consolidation loan suddenly increase, you may not be able to afford your monthly debt repayments.

Your debt isn’t reduced

A debt consolidation loan does not reduce your debt. Instead, it replaces your smaller debts with one large debt that you pay off over a very long time period. This is not a long-term solution to your financial problem.

To get onto a path to financial freedom, you need to spend wisely, save for the future and emergencies and rather seek a long-term solution to your problem such as debt counselling.

4. Not sure where to go from here?

Speak to one of our experts about debt counselling and find out if it’s the best solution for you. Take the first step towards a debt-free future. Don’t wait until it’s too late. Get help by contacting Debt Rescue. We’ll guide you every step of the way until you’re completely free of the chains of debt.