Taking out a debt consolidation loan can change your circumstances drastically if you’re struggling with debt. It can jumpstart your journey to a financially thriving future.
We find out what a consolidation loan is, the advantages and disadvantages of taking one out, and we consider the point at which this becomes a viable option.
Tip: You can apply for a consolidation loan today by clicking here and filling out the form.
What is debt consolidation?
According to Neil Thompson, head of product and customer value proposition at African Bank, consumers are often warned against putting all their eggs in one basket. However, he believes that when it comes to simplifying debt, a consolidation loan, which does exactly this, has many positive spin-offs.
“A consolidation loan is a personal loan which a customer can utilise to settle external debts. Any remaining capital can be paid into their bank account,” says Thompson.
“Simply put, debt consolidation is when you take out a new loan to pay off and settle other loans or debts. Basically, you are transferring all those loans from different lenders into one loan with the aim of paying one instalment going forward to reduce fees,” he explains.
READ MORE: Checklist for a good consolidation loan
What are the advantages and disadvantages?
Thompson points out the following advantages of a consolidation loan:
- It can free up cash flow and provide access to additional capital, which could come in handy in an emergency. It’s a fact that many consumers do not save for emergencies, and since these arise when least expected, having money available to cover the necessary expenses is important.
- Pooling debt into one loan repayment can lower the cost of credit.
- Loan consolidation can help to avoid damage to your credit record, which can happen with missed credit card payments and defaulted accounts.
With this in mind, he explains that it’s good to also consider the main disadvantage of taking out a consolidation loan.
“The one disadvantage is that the term to repay the loan might be extended. This becomes a new loan with a new term and you might end up paying more in the long run,” says Thompson.
When should you consider this option?
Thompson believes that anyone who wants to reduce the stress and cost of paying multiple creditors should consider a consolidation loan.
“To get the most out of debt consolidation loans, consumers must be clear about what they want to achieve. Ultimately, a consolidation loan should result in a consumer consolidating multiple monthly instalments into one monthly instalment that is lower than the combined payments,” says Thompson.
He adds that it’s never too early or too late for consumers to take control of their finances, and to try to simplify credit and deal with debt effectively.
“By combining all your debt repayments into one, easy loan repayment today, you can help yourself to go into 2021 on a stronger financial footing,” says Thompson.
Start your financial recovery today by clicking here for a consolidation loan.