When people start feeling the pressure of bad debt, one of the first solutions they think of is a consolidated loan. At first glance it seems pretty attractive, right? Instead of trying to keep track of all your separate repayments every month, a debt consolidation loan combines debts from several creditors. You then make one payment to one creditor every month, instead of multiple payments to multiple creditors. Sounds great! But what people tend to forget is what got them into debt in the first place – bad spending and saving habits. While a debt consolidation loan might ease the burden of making multiple payments every month, it doesn’t address this root cause of the problem.
1. Interest rates may go up.
On 19 June, as the Rand’s plummeted to its weakest in almost seven months against the Dollar, central bank Deputy Governor Kuben Naidoo announced that the central bank would have to act and increase interest-rates if the trend continued. Higher interest rates will reflect in loans, and you will end up repaying more on your consolidated loan.
2. Repayment period is longer
Paying off a consolidation loan can take anything from five to twenty years. That’s partly because many consolidation companies charge very high upfront fees and interest rates, so your total interest payable adds up to more expensive debt, causing you to pay off your loan longer, even if the monthly instalments are lower.
3. Addressing the cause of your debt
Unorganised payments didn’t land you in bad debt. Bad financial planning did. Every household should have a monthly budget that is tracked and reviewed every single month. Free financial planning and budgeting apps like Stash, 22Seven and GoodBudget, make it easier than ever to track spending and encourage saving. Try and identify what the causes are of your over-spending, put a budget in place, track your spending and put coping mechanisms in place for when one of your “spending triggers” rears its ugly head.
4. Your debt is not necessarily reduced
Debt consolidation replaces your current debt with different and even longer debt; it does not reduce your debt and is not a permanent solution for over-indebted consumers.
Before you sign on the dotted line and shackle yourself to even more long-term debt with a consolidation loan, talk to a qualified debt counsellor about your options.