Debt consolidation loans or debt rescue loans are a form of debt refinancing, that means you take out one loan to pay off many loans.
There are people that say debt consolidation is a con, because it dupes you into only thinking you’ve done something about your debt. Actually, you’ve only moved your debt but it’s still there and the habits that landed you in debt are probably still there.
It’s harsh to say such things we know as this doesn’t apply to people that were retrenched or because of reckless lending. But this is true for so many people and the only solution is for them to learn how to survive on less and not more debt.
People applying for debt consolidation are usually already financially stressed or in danger of getting there soon. So many people make the mistake to think that debt consolidation is the answer to their problems when in fact, it’s like putting a plaster on a serious wound.
The problem is debt and you can’t always borrow money to deal with debt. But it’s also true that there are some savvy ways to deal with debt.
Example: A home loan is usually the cheapest form of credit. Depending on your credit profile, you’re either a little above or below the prime rate which is mostly about 8.5% interest. A personal loan is usually about 21 – 32% per year. That’s why so many people use their homes to buy big ticket items like appliances or furniture, making sure they don’t stretch the repayments over the term of they’re bonds.
Many people will take out a new loan against their house so they can pay off other debt. That means they end up with one loan payment with low interest every month. The danger is, now that they have more rands at the end of every month, they spend it on non-essentials and ends up being in debt again. Even though the best solution would be to pay off your home loan as quickly as possible with at least half the money you’re saving, so many just fall back into the same pit.
It’s then advised to use debt consolidation to save on interest and not to reduce your longer-term monthly debt repayments. The other big danger of using a home loan to consolidate your debt is the risk of losing your home when you can’t do any payments.
Before you apply for debt consolidation, make sure you check this list first:
It’s very important that you use debt consolidation to settle all of your smaller debts and stop yourself from creating new debt again. It’s best to close some or even all of those accounts. Should you have any questions or would like to leave a comment, please go right ahead as we’d love to her from you.