Welcome back to my blog. Thank you for taking time to reading my posts, I sincerely hope they will add value to you. Today we are talking about Consolidation Loan. What is it? The benefits, Is it a smart move to take one, and things to consider before taking one.
What Is A Consolidation Loan?
A consolidation loan is a loan that pays all your current debts and you end up with one loan. As most credit providers would put it ” they take all your debts and put it into one basket so that you have one installment.” It woks the same as personal loan, the only difference is that the funds are disbursed to your other loans, credit cards and retail accounts. Remaining funds are then disbursed to your account.
Why Do People Sign Up For Consolidation Loans?
Most of the time people take consolidation loan because they are looking for relief in the instalment on their accounts. Some take the loan because they are promised lower interest rates. Some because they are made to believe that it is better to put all your instalments in one basket and make one payment.
What Are The Benefits Of A Consolidation Loan?
- You get to have one instalment making it almost impossible to miss monthly payments.
- A possibility of a lower instalment.
- You pay one credit life insurance.
Is It Smart To Get A Consolidation Loan?
The answer to this question is totally depending on an individuals case, personally I do not believe that taking a consolidation loan is a smart move as it doesn’t cut down on the total amount of debt owed. Just because all debts has been consolidated to one account, doesn’t mean the total amount owed has decreased. Another thing, debt consolidation is an unsecured loan. This means that the interest rate is potentially high. When putting all your debts in one basket, you could be missing out on paying some your debts with lower interest rate faster and use the freed amount to contributing towards other instalments.
What To Consider Before Signing Up For A Consolidation Loan?
- The amount of money you have already contributed towards your current loans.
- Remaining number of months, you could be left with 6 months to pay off everything.
- Interest rate, you could find yourself paying more than the initial rate in the long run.
Let us look at this in a practical example: Assuming you owe Company A, B and C a total amount of R 150 000.00 from 2017; with a total instalment of R5000.00 which was going to be paid of in 2023. Then in 2019 company D offers to consolidate for you and the total balance is R125 000.00. Instalment then drops to R3500 which will be paid up in 2025 which is great but do consider this:
- Instalment has been reduced not because of you have saved, but because your R5000 payment was based on the R150 000 not R125 000.
- R5000 payment over 2 years is not equivalent to R25000(150 000-125000), so you have basically contributed more interest to all these 4 companies.
- You have delayed yourself to being debt free by 2 more years.
- Because we are human beings, and we have a nature of repeating harmful things, therefore you can not guarantee if you are not going to repeat the same pattern by 2023 extending to 2027. I have published a book Healing The Wounds Of Debt which gives healing techniques on how to avoid such repetitive unconscious behaviors.
Thank you so much for taking time to reading this post. If you feel stuck with your debt feel free to contact me for a coaching session at 074 931 1000.