Debt can get out of hand if it’s not managed properly. That is why it’s important to be realistic about your budget and consider affordability before you take a loan. However, if your debt still gets out of hand, there are ways you can rein it in again.
Consolidating your debt with a loan is one of them. We spoke to an expert to find out what a good consolidation loan looks like.
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How does a consolidation loan work?
According John Manyike, head of financial education at Old Mutual, when you consolidate your debt with a loan, you borrow a new amount.
This process helps you bundle all your debts and bring them under one creditor. Instead of having multiple instalments, you’ll have one, and you’ll pay a single, usually lower, interest rate. If there’s a surplus left after the creditor has paid all your debts, it can be transferred into your account and be used to achieve any of your financial goals.
However, before you make your way to a prospective lender, you need to sit down and take stock of all your loans. Check the contracts and the terms and conditions of each. Calculate your total payment for these loans. If you have small loans that you can afford to pay back, do so, as it will save you money in the long run. Once you have decided which loans you want to consolidate, you can contact the lender.
READ MORE: Is it time to consolidate your debt?
How to spot a good consolidation loan?
Before you sign for a consolidation loan, Manyike suggests that you ask these questions:
- Does the loan reduce your interest rate(s)?
- Does it reduce fees and credit life insurance costs?
- Does the credit life insurance include death, disability and retrenchment cover?
- Does the loan reduce your current total monthly repayment?
- Is the repayment amount responsible and feasible, as a percentage of your income?
- Does the loan take into account your future financial needs?
- Will a consolidation loan result in settlement of all, or at least most, of your existing debt?
If you can answer yes to all of these questions, this can be considered a good consolidation loan.
There is one final step before you go ahead, which is to review the spending patterns that got you into debt. Consolidating your debt with a loan can give a false sense of financial freedom, which can result in over-indebtedness. You don’t want to land up with an untenable amount of debt once again.
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