MONEY
20/06/2018 13:08 SAST | Updated 20/06/2018 13:08 SAST

5 Things You Need To Know About Debt Consolidation, If You're Considering It

It does not reduce the amount of debt you owe; it merely combines it all into one loan.

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Paying one monthly instalment through a debt-consolidation loan to service all your debts can seem very attractive, especially if you're struggling to meet your creditors' obligations.

A debt-consolidation loan is a single loan that combines debts from several creditors, potentially at a reduced interest rate and lower monthly payment. You then make one payment to one creditor every month, in place of multiple payments to multiple creditors.

And while this may seem like a lifeline, there are five important things to consider before signing on the dotted line, advised local debt counsellor Stephen Mulima.

1. It's a loan

Mulima stressed to all consumers considering debt consolidation to remember that while it may offer you some relief, it's still a loan. "It's a loan with interest rates and terms and conditions. If interest rates rise unexpectedly, for example, it can put you under pressure, as you'd be expected to pay more towards your loan," said Mulima.

2. Repayment period is longer

Paying off a consolidation loan can take anything from five to twenty years. That's partly because many consolidation companies charge very high upfront fees and interest rates, so your total interest payable adds up to more expensive debt, causing you to pay off your loan longer, even if the monthly instalments are lower.

3. Shop around

The new loan should potentially have a lower interest rate and monthly payment than the combined cost of the bills you consolidated. It's therefore advisable to shop around for a consolidation loan that offers the lowest interest rate throughout the repayment period and a possible lower monthly payment.

4. Small print

Pay attention to the small print, advised Mulima, as it may contain clauses such as interest rates for the consolidation loan increasing after the first 12 months, and over the next 12 months. An unsuspecting consumer can feel that they're paying in unending cycles — but they simply did not notice the fine print.

5. Your debt is not necessarily reduced

Debt consolidation replaces your current debt with different and even longer debt; it does not reduce your debt, and is therefore not a permanent solution for over-indebted consumers, cautioned Mulima.

"There is no shortcut to cleaning away debt. If habits that landed you in debt in the first place are not dealt with, it's likely that you'll face it again," he said.