20/09/2016
Debt consolidation loans can be used wisely or unwisely, but there are many advantages which debt consolidation offers when used sensibly.
A debt consolidation loan is a lump sum loan taken to pay off multilpe debts. A reason to consolidate smaller debts into one loan is usually to secure a lower overall average interest rate. Basically, a debt consolidation loan replaces high-interest short term debt (examples are credit cards, store cards, personal loans, etc) with a lower interest rate loan which usually has a longer term. Debt consolidation allows you to start a clean slate, by converting your various existing commitments into a single, manageable monthly payment. This also saves on multiple fees, administration charges and costs.
The result of debt consolidation is that the monthly repayment will be lower on the consolidated loan compared to the combined monthly repayments of the smaller debts, which in turn improves cash flow. So if you’re battling to afford your monthly repayments on your debt, this could be a solution to avoid events such as blacklisting and repossessions.
Logically, you should not pay short term expenses with long term debt. However, this may unfortunately be one of the only options open to you. If you are currently in danger of defaulting on your debt repayments, you will need the breathing room from this cash flow improvement to bypass any defaults.
Successful debt consolidation allows freeing up money, therefore you will have more to spend. A smart consumer should either save this money or put extra towards their current debt to benefit from debt consolidation.
There are multiple benefits to Debt consolidation:
- Making a single payment
- The consolidated installment may be less than the combined original installments
- Stress Reduction
- Financial rehabilitation
- Retain credit worthiness
- You may get savings if the debt consolidator negotiates reduced settlement balances with your credit providers
