When you start debt consolidation, you will have the opportunity to bundle all your outstanding debts into a single debt. This will simplify what you owe, and often reduce your overall payments.
But which debts are you allowed to include in this process? We recap what debt consolidation is and we outline the different kinds of debt you can include.
Tip: Get started with debt consolidation today and ensure you get out of your debt trap.
What is debt consolidation?
Debt consolidation is when you take out a big loan to settle all of your outstanding smaller loans, so that you have a single payment to keep track of each month and, in most cases, you will pay less.
For example, imagine you have credit card debt of R10,000 at 17% interest, a store account of R5,000 at 12% interest, and a personal loan of R35,000 at 16% interest. These add up to R50,000 with an average interest rate of 15%.
If you take out a consolidation loan of R50,000 with an interest rate of 12%, you can immediately settle your three separate debts and pay a lower interest rate overall. You may also need to extend, or be able to reduce, the period of your loan, depending on the agreement you set up with your creditors.
The debt you can consolidate
Debt is usually divided into two main categories, namely secured and unsecured. The former refers to debt that’s tied to an asset, such as a house, and the latter is debt that’s not tied to an asset.
When you take out a consolidation loan, you can include debt from either of these categories, as well as debt that lands outside of these bounds. Below is a list of the most popular kinds of debt that people consolidate:
- Payday loan: This is generally taken out when people are desperate and they can’t afford basic living expenses. It comes with very high interest rates and consolidation is a good idea.
- Personal loan: This often has a very high interest rate because it’s a prime example of unsecured debt. A consolidation loan can help reduce this interest rate.
- Student loan: This is long-term debt and it usually has a reasonable interest rate. However, if the remaining balance is small, and you have other debt, it could help to consolidate it.
- Credit card debt: This has a notoriously high interest rate and people often struggle to keep this debt in check because it’s easily accessible. A consolidation loan can help tie up this loose end.
- Vehicle finance: Since this debt is tied to an asset, it’s considered secured debt and the interest rate won’t be as high. However, it can be added to your consolidation loan for simplicity, and to save on debit order fees.
At the end of the day, any debt can be included in a consolidation loan. It’s best to chat to a qualified financial adviser or debt counsellor about your unique situation, as they will be able to assess your outstanding amounts and interest rates and set up the optimal consolidation loan for you.
If you’re ready to mend your financial situation, fill in this form and an expert will give you a call.