Debt consolidation is the process of using a loan to pay off other debts. Now, this may not sound like a very bright idea at first, but everything has its good and bad sides. Debt consolidation serves as a lifeguard between drowning in debt and swimming in it. Debt consolidation gathers all the user’s debt and allows him/her to pay one large amount rather than many amounts.
Read on to understand the basics of debt consolidation and see how things like debt counselling fit into the picture.
Many people have turned to debt consolidation when they realise that they are out of options and bankruptcy is around the corner. While debt consolidation involves a lot of risks, it gives the user in debt chance to gather money to repay the loans that got them into trouble the first time.
If you are not sure where you stand with your level of debt, these are the obvious signs that you are over-indebted:
With a debt consolidation loan, you simply add together all the outstanding amounts you owe to various lenders, and move the total amount to one debt consolidation lender. This lender takes on all the other debt and risk you had with it. You will thus have one monthly instalment with one interest rate, and instead of paying countless individual lenders, you’ll only click once to pay. This makes your repayments easier to manage - BUT, it does not make them vanish into thin air.
So is a debt consolidation loan the answer to bad debt? It could be. The reason this type of loan can be helpful to you is that it can solve three of your worst obstacles:
A Debt Consolidation Loan may allow you to get a lower interest rate, which would save you cash in the long run. But, this comes at the cost of a longer repayment period and at times the lower monthly repayment amount over a longer period means a higher total amount repaid. If you have considered it in the past and are unsure right now, these are the biggest benefits of debt consolidation:
But, keep in mind, it's only the solution to bad debt if you handle it with responsibility. While there are some real benefits to debt consolidation, it is important that you do your part in understanding that you are still responsible for your debt.
So, by now you are already stressed out enough and do not need more on your plate. Here are 5 methods to make this as easy as possible that include some general tactics to consolidate debt repayments.
We list this option first because it is quite often the option people feel safest with. Choose a responsible debt consolidation lender willing to consolidate the loans you are least capable of working in your monthly budget right now.
By paying a monthly fee to a counsellor, you can try to solve your debt without getting a loan. This is one of the other most obvious forms and is why we list it second. This is seen as a form of debt consolidation because you pay to reduce your debt. Learn more about this below.
Search for the lowest interest rates possible when applying for a credit card to consolidate your debt. If the interest rate is higher than your outstanding debt, this won't be smart though. Remember, the purpose of obtaining this credit card is to reduce your debt, rewards don’t matter as much as interest. Make sure your credit card is set on a fixed limit and lastly, pay attention to the fine print.
See if you qualify for a secured loan by contacting a bank or a lender. Do not overlook private financial institutions as they sometimes offer the most affordable interest rates on loans.
These loans are a bit harder to obtain as the credit background check is more strict than secured loans. They have higher interest rates but offer bigger amounts once the loan has been approved and longer repayment periods. The danger of this is that you could fall into a bigger interest rate trap and increase your outstanding debt!
Banks offer secured and unsecured (risking an asset as collateral to pay the loan) consolidation loans. The biggest perk of asking a bank to help you with your debt is that you know they know who they are talking to. Depending on which bank you choose to take out the consolidation loan, you can usually get good references (and bad ones) which makes it easy for you to make a choice.
Or, finance companies. These lenders do not accept deposits like other financial institutions. They will pay off your debt for you, and send you a bill at the end of the month. Specialized lenders will do a background credit check although they are not extremely strict. They are based on interest and will require their payment in full once your debt has been cleared.
There are a few things that are necessary to keep in mind before opting for debt consolidation. Make sure the following points are part of your checklist when choosing to consolidate your debt:
Debt review, also known as debt counselling, is a debt relief measure created in terms of the National Credit Act (NCA) to assist consumers that are over-indebted. This is done through budget advice, restructuring of debts and negotiating with creditors. It is also a process created to protect consumers - specifically against credit providers.
It is different from Debt Consolidation because it doesn't only streamline a couple of debt repayments into a simpler and longer repayment strategy. It rather takes into consideration all your accounts and debt standing to help you rebuild your credit health through a holistic strategy.
It is important to note that to qualify, you have to have a distributable income [regular income], as this will be used to offer reduced payments to your credit providers and create a payment plan. If you are married in community of property, you and your spouse must jointly apply for debt review.
It is important to not use the services of just any person offering to help you with your debt. To get the full protection of the NCA and to protect you against fraudsters, only use a debt counsellor that is registered with the National Credit Regulator (NCR). These debt counsellors are specifically trained, verified and approved by the NCR. You can verify whether it is a registered debt counsellor by checking their registration certificate. The certificate should have the NCR logo on it and should display the debt counsellors details, as well as their registration number. You can also search for a registered debt counsellor on the NCR’s website.
The debt counsellor will need the information below to best assist you in setting up a repayment plan
Essentially, they will determine whether your debt repayments are unaffordable, taking in to account your current income.
If the debt counsellor confirms that you are over-indebted, you will then be able to officially apply for debt counselling. It is very important that the debt counsellor explains all the applicable fees to you at this stage and that you make sure you fully understand them.
The debt counsellor will take the information you provided and do some calculations. He will calculate how much money you need for living expenses and what you can afford to repay every month.
The debt counsellor will contact the credit bureaus and inform them of the fact that you are under debt review. They will then list you as such to ensure your full protection. This is not like being blacklisted. Once you have repaid all your creditors, your name will be removed from this list.
The debt counsellor will contact all your credit providers to ensure that the information provided is accurate and to make double sure of the amount that you owe them.
This is NOT like a blacklisting – it’s a protection. It will be removed completely once you’ve paid everything off.
If all the credit providers agree with the repayment proposals offered by the debt counsellor, a legal ‘consent order’ will be obtained. (Often, this could mean a reduction in fees and interest payable by the consumer.)
This means that the terms have been agreed to and can’t be changed independently by any of the credit providers.
Should one or more of the credit providers not like the terms, the debt counsellor will have to approach a magistrate with the proposed debt repayments to get a decision. As long as the repayment plan is reasonable, the court will most likely approve it.
Once an agreement has been reached, the debt counsellor will give you your final repayment plan and also submit it to a Payment Distribution Agency.
This agency will take a lump sum from you each month and split it up between the credit providers, according to the repayment plan.
Your obligation is to keep up the monthly payments until such time as the whole amount has been paid off.
But keep in mind, it's only the solution to bad debt if you handle it with responsibility. While there are some real benefits to debt review, it is important that you do your part in understanding that you are still responsible for your debt.
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