Debt consolidation unifies multiple debt, typically high-interest unsecured debt such as credit cards, into a single manageable debt payment. You can use the process to re-organize debt, reduce monthly repayments, pay back a lesser amount, and get a better interest rate on your loan. Below we look at debt consolidation and interest rates options.
Debt consolidation loan or debt review?
There are two ways to approach debt consolidation: either on your own by taking another loan to replace your existing debts, or having a debt counsellor renegotiate a consolidated debt loan on your behalf.
Take a debt consolidation loan. Use the money from this new loan to pay off the existing debts in full, then pay back the remaining amount to the loan provider in monthly instalments. You have to negotiate the new loan terms and discuss a lower interest rate with the debt consolidation provider.
The better your credit score and standing, the lower an interest rate you can expect. Hence, it may not be the ideal choice if your credit score is too low or you are over your head in debt.
Choose debt review consolidation. Use this legal process to secure a reduction in interest rates or a loan extension, especially with high indebtedness levels.
Your debt counsellor handles the debt consolidation process on your behalf and manages the repayments directly to all creditors. At the same time, you only need to pay back the debt counselling provider one affordable monthly instalment until the debt is paid off.
When is debt consolidation a good move?
Debt consolidation can be an excellent option when you have difficulty in managing or paying off multiple debts every month:
- You have multiple debts to pay every month and need to simplify your finances into a single manageable loan
- You struggle to repay all your monthly loans or credit accounts on time, and you benefit from having only a single debt payment to worry about
- You have little to no disposable income left after paying each debt on time, so you need to reduce the loan repayments to free up cash
- You are defaulting on payments because your monthly instalments are too high, and you need to lower them asap by renegotiating a lower interest rate or extended loan terms
As helpful as it sounds, debt consolidation is certainly not the cure for all your debt problems or uncontrollable spending habits. Depending on your financial circumstances, it may bring only negligible savings or relief to a deeper debt issue.
If your debt is out-of-control, speak to a debt counsellor to assess the overall situation before jumping onto debt consolidation loans.
Suppose you are severely over-indebted and your debt repayments exceed more than half of your income, or you are missing out on regular repayments. In that case, even a single debt consolidation loan may prove difficult to negotiate or manage on your own.
Choose instead professional debt counselling help and debt review consolidation to get the maximum out of the renegotiated repayments and interest rates.
How does debt interest consolidation help?
With multiple credit lines, interest rates may vary considerably depending on credit type, risk profile and credit score. Debt consolidation removes the multiple interest problem through one fixed interest loan. You are charged a single interest rate on your debt consolidation loan, often a reduced rate compared to the original loan terms
The interest rate for the debt consolidation will depend on the total loan amount, the monthly instalment that suits your budget, and the lowest interest rate you can qualify for, according to your credit record.
What is a good debt consolidation interest rate?
For example, you can have three credit cards with interest rates ranging from 20% to 24%. You could replace the three credit card debts with a debt consolidation loan at an 18% to 20% interest rate, pay off the initial credit and continue with the loan repayment at the new much lower rate. Debt interest consolidation loan rates can be as low as 15%.
Generally, interest rates for debt consolidation loans tend to be higher, as with any high-risk loan, particularly if you have a history of defaulting and over-indebtedness. This means more accrued interest and an increase in the total payable debt amount.
You may, however, negotiate a lower monthly payment and an extended loan term to replace multiple debts, which counts towards your ability to pay off the one debt without fault every month.
In the case of debt review consolidation supervised by a debt counsellor, debt consolidation interest rates are reduced as renegotiated with credit providers to give the borrower the chance to pay off the debt.
As a result, you decrease instalments and pay back less debt than the initial agreement via one lower monthly repayment. However, prepare to have your debt review on your credit record, which may be a small temporary price to pay for getting rid of your out-of-control debt.
Need help with paying off debt? Consult an ezDebt counsellor today.
Our professional ezDebt advisers help you stay on track with debt repayments through affordable debt counselling and debt consolidation loan management. All our debt counsellors are registered with the National Credit Regulator (NCR). Get in touch at www.ezdebt.co.za.