Debt Consolidation 101

Written by Your Future Now

Being over-indebted is probably one of the biggest hurdles on the road to financial fitness. When it feels like you’re drowning in a sea of financial debt, debt consolidation can be your lifejacket during those tough times. This Your Future Now article focuses on the things that you need to know before you think about applying for debt consolidation.

What is debt consolidation?

Debt consolidation is the process of combining all your existing debt into one consolidated loan. This means that you will have a single loan repayment for all your existing debt. Another benefit of a consolidation loan is that you can also reduce the cost of monthly administration and insurance fees, as you will only be paying these fees on a single loan. Consumers can reduce the cost of administration fees by up to 20% through debt consolidation. A consolidation loan also allows you to extend your loan repayment period, which means your monthly payments are reduced and more affordable. Bear in mind that debt consolidation will also increase the total amount of interest you pay, meaning you will be paying off a higher total amount in the end.

Is a consolidation loan for you?

Applying for a consolidation loan can see you living a debt-free life sooner than later, provided that you are committed to becoming debt-free. Debt consolidation should be considered if your monthly debt repayment expenses are higher than what you can afford. The road to debt recovery is long and challenging but ultimately rewarding. If you are dedicated to slay the debt dragon, a consolidation loan might just be the answer you have been looking for. If you feel like you’re drowning in a sea of debt, a consolidation loan can be your rescue, provided that you are ready to become more responsible with your finances and commit to getting out of debt.

What affects the outcome?

Your credit score can affect the outcome of your debt consolidation application and also whether you will be able to afford the newly proposed repayments. Having a good credit score can reduce the interest rate charged on your consolidation loan. Having a bad credit score on the other hand can see you paying a much higher interest rate, as the financial institution will see you as a high-risk customer.

What about my credit score?

Debt consolidation can affect your credit score in a positive or negative way depending on your behaviour. After successfully applying for debt consolidation, credit providers will consider your other accounts as being settled or paid in full, as all your debt is worked into a single loan. This will have a positive effect on your credit score. Another way to improve your credit score in the long term is to ensure that make your consolidation loan repayments in a timely manner.

On the flip side of the coin, debt consolidation can also have a negative impact on your credit score. Missing any of your debt consolidation repayments can harm your credit score severely. Consumers should also avoid closing credit card or retails accounts once these have been consolidated into a consolidation loan. Even though these accounts shouldn’t be used once consolidated, they still contribute to your credit score. Financial service providers will see the closing of these accounts as the amount of credit made available to you decreasing, but your debt level remaining the same. When applied correctly, the long-term effect of debt consolidation on your credit score can be positive – it is up to you to determine the outcome of this journey.

Make a change

We mentioned that you have to take full responsibility of your finances and become a more disciplined consumer after you have applied for debt consolidation. Reflect on your past behaviour to see why you got yourself into debt in the first place – this will help you steer clear of similar behaviour and spending habits in the future. The best way to take control of your finances after applying for debt consolidation is to set up a strict budget and stick to it. Failing to stick to this budget and returning to your old ways will see your debt consolidation dream being turned into a nightmare. It is crucial that you don’t make further use of credit to finance your expenses once you have successfully applied for debt consolidation.

If you are ready to make a change for the better, speak to a financial adviser on the various debt consolidation options available to you.

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