In life, you get the ‘lovers’ and the ‘haters’ and the same applies to debt consolidation. The haters of debt consolidation point out all the disadvantages, making the argument that, just because it involves ‘doing something’ about your debt, it makes you feel like you’ve accomplished something. Even though your debt is still there, larger than life, as it was before you rolled it into one big ball.
You see, the haters make a good point when they say that one of the disadvantages of debt consolidation is that it puts you at risk of clocking up even more debt, as it does not address the bad habits that landed you in debt in the first place.
On the other hand, if you’ve fallen into debt because of retrenchment, reckless lending or other circumstances beyond your control, which is so often the case, it would be a bit unfair to say you’re to blame.
However, many people have personally made their own debt beds with expensive Egyptian cotton sheets, which they bought on credit, along with a few pricey duck-down pillows, 100% silk night gown and… you get the big idea. Before they know it, these individuals are buried in debt, plus loads of inessential loot that doesn’t really belong to them.
Another disadvantage the haters harp on about is that, those individuals who apply for debt consolidation loans are, in a sense, trying to ‘borrow their way out of debt’. When they put it that way, I suppose it does sound a bit ridiculous! They think of debt consolidation as a flimsy plaster, whereas being over-indebted is a haemorrhaging, gaping injury!
For some, this metaphor might seem a tad melodramatic. Then again, any over-indebted individual will agree, it’s a slippery slope down from falling into arrears to becoming over-indebted. Debt creeps up on you and that’s why it’s essential to stay on top of your finances by changing your behaviour, instead of opting for quick fixes.
Similarly, if used wisely and in the right conditions, debt consolidation can prove to be a very effective debt solution. The lovers of debt consolidation will point out that it simplifies your affairs, saving you from having to juggle countless credit providers and financial agreements, with various interest rates, terms and monthly instalments. You just pay one instalment a month to one credit provider, using one big loan, covering all of your smaller debts in one fell swoop!
Furthermore, the lovers will sweeten the pot by noting that debt consolidation comes with a reduced overall average interest rate. Keeping in mind, you will be paying off your debts over a longer term. In this way, it provides you with immediate financial relief, as lower monthly instalments mean better cash flow, mean you’ll be able to maintain a normal standard of living once again. In light of the above, debt consolidation starts to look all the more appealing.
The haters will warn you that, in order for debt consolidation to really work, you need to be financially disciplined, otherwise it’s bound to worsen your situation. Then again, if you have the utmost confidence in your sterling financial discipline, you could opt to consolidate your debts using your home loan.
This will depend on whether or not you have sufficient equity in your home. This means that the value of your home must exceed the amount you owe on it. In this case, you could take out an additional bond for the amount of all of your smaller debts combined and accordingly settle these.
Just remember, even though you are saving on interest every month, taking out an additional loan on your bond means that you are now paying off the same debt over a much longer period of time –we’re talking 20 years, instead of 4 or 5.
On the other hand, you could speed things up by paying in what you save on interest each month, provided that you can afford to do so. The problem with having more money to play around with, is exactly that – you will be tempted to play around with it. In which case, you could end up in financial ruin, without an option in sight. Moreover, you risk losing your home.
Thus, paying in that bit extra at the beginning of every month is the best way to go about debt consolidation. That way, the money won’t sit around in your account, singing you siren songs and tempting you to blow it all!
As a piece of parting advice, by no means use your consolidation loan on consumables such as food. And, avoid falling back into the same bad habits that created your over-indebtedness. Debt consolidation can help you out of a financial crisis, but only if you use it to pay off your debts!