Debt consolidation companies: Good or bad?

Lynn Prins

Finding yourself in tight debt situations may cause sleepless nights and prompt you to consider whether debt consolidation may be your way out.

Debt consolidation is a form of debt refinancing that involves taking out one loan to pay off all other debts in one fixed payment. This personal finance process provides a solution to individuals with high consumer debt by simplify all debt into one fixed monthly payment. This may be a relief to many as the interest rate at which you pay back the debt is now fixed.

In most cases, consumers find themselves in financial trouble due to short term high interest debt such as personal loans, store credit, and credit cards. The compounding effect of the interest rate is what eats away at all disposable incomes across the country.

According to Johan Maree, CEO of FNB, credit and debt consolidation is a good idea for a variety of reasons.

“Debt consolidation is a good idea if you are battling to keep track of your debt due to it being spread across a range of accounts and loans, if you are unable to meet the monthly required minimum repayments, or if you simply want to find a better rate. It is an effective way of taking control of debt as it allows you to merge retail store debt, short term loans, personal loans and other credit card debt into one account”.

Debt consolidation companies are known to solve three of the worst consumer problems:

High interest rates of debt:

Some types of debt (particularly credit cards) can have extremely high interest rates – up to 25 percent or more. If you are in that kind of situation, there is a good chance your debt will grow faster than you can pay it off. Which is why a consolidation loan can often prove to be a better option: it may allow you to get a lower interest rate, which can save you money over the long-run.

Struggle with high monthly payments:

People with mass debt often struggle with high minimum payments as they are sometimes more than they can afford each month. That can lead to a domino effect when payments are missed due to interest accrued.

A debt consolidation loan can sometimes lower your monthly payments dramatically to leave you with enough breathing room to get back on track.

Confusion because of too many bills:

Keeping track of your debt is another problem which makes it hard to even keep track of which payment is due on which date. Consolidation can help with this problem by reducing the number of bills you get down to a single payment. That can make it easier to focus on getting out of debt.

So is debt consolidation a good idea? It merely depends on your situation.

Critics of debt consolidation say it’s a ‘con’ because it fools you into thinking you have done something about your debt. They believe your debt is still there, you have simply moved it.

This might sound a bit harsh and could make you feel despondent, but with every situation there is always an advantage and disadvantage. Before you decide to choose a debt consolidation to regain control of finances, weigh up the pros and cons and make sure it is the right financial situation for you.

Despite the benefits of debt consolidation, it is very important that you do your homework and understand there is a wide range of options when it comes to debt consolidation loans – some are good, some are bad, and some are downright predatory.

Consolidating your debt, if you are not keeping up may be the only solution for you as it organises your payments accordingly. However, if you simply wish to swish your debt around in a bid to seem productive, debt consolidation will do you no favours either.

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