The ugly truth about debt consolidation

Seventy percent of people who take out consolidated loans end up in bad debt again. Here’s why.

In almost 90% of cases at DebtCare, clients considered debt consolidation as the answer to their bad debt. It seems simple, doesn’t it? If you consolidate all or most of your debt, it’ll make payments easier and you’ll be more organised with your money, right? Wrong! Seventy percent of debt-stressed people who opt to consolidate their debt usually default on payments and find themselves in a worse position than before.

Are you ready for the ugly truth about debt consolidation?

Debt consolidation only addresses the symptom of debt problems. It doesn’t take into account that years of bad financial habits are what need to change in order to get out of debt and remain debt-free. In many ways, consolidation loans are like trying to set a broken bone with a small Band-Aid.

‘My wife and I decided to take out a consolidated loan because we wanted to manage our debt. The single monthly payment made more sense than trying to deal with home loan payments, credit cards, store cards, for instance. The loan left us with a little extra money. Instead of paying off debt, we decided to buy electronics. That quickly spiralled into redoing the bathroom and we kept finding new excuses to spend. We had a false sense of control. To cut a long story short: we ended up facing severe legal ramifications for defaulting on our debt.’ – Anon

Another popular consolidation method is to refinance your home. The trouble here is that you’re taking unsecured debt and securing it, risking your home. If you’re living on the financial edge, with out-of-control credit card bills, it may be appealing to roll those debts into your home loan and deal with that new fixed payment every month. Just remember – if you fail to pay your credit cards, they’ll go into default; they might go to creditors and you could even be sued for them BUT your house would be unaffected.

‘I refinanced my home to finance a new business venture. When my partner defaulted on payments, I had to file for bankruptcy. The bank repossessed absolutely everything I had. My home, vehicle, electronics, even my son’s car and flat which we had invested in together in better financial times. Getting a phone call from your son saying that there’s someone at his home collecting his car is crushing. Be careful when putting your home on the line for anything.’ – Renata

Debt consolidation vs debt counselling

Debt counselling Debt consolidation
 Interest rate is lower  Interest rate is higher
 Can’t make more debt during process, only after  Can make more debt
 Creditors are managed on your behalf  Creditors are free to contact you and make demands
 Solves the cause of debt by creating new financial habits  Addresses the symptom of debt not the cause
 No need for surety  May need surety such as a home or car
 No permanent record if debt review is completed  Permanent record if payments are defaulted
Debt relief in five days Debt relief only after application has been approved

A qualified debt counsellor can help restructure your debt by:

  • Assessing your debt status
  • Negotiating with your creditors
  • Lowering your interest rate
  • Extending the repayment period
  • Working out a single repayment amount, which you pay on a monthly basis and which is distributed to your creditors.

By helping clients create a healthier relationship with money, debt counselling has the power to completely rehabilitate debt-stressed consumers. – Cadle Odendaal, Debt Counsellor, Counseling languages: English, Afrikaans NCRDC1362.

Leave a Comment

Your email address will not be published. Required fields are marked *