Most people apply for different kinds of loans during their lifetimes such as student loans, personal loan, car loans, and others. The biggest responsibility is to repay these loan amounts promptly. And that’s where most people struggle.
They are unable to keep track of their repayments and forget to pay on time. This results in penalties and we know you certainly don’t want that! So, the best way to repay all your loans efficiently is through debt consolidation.
What is debt consolidation?
Debt consolidation is a smart way of repaying all your smaller loan amounts with efficiency. This financial product will create a large load of debt by combining your smaller debts.
This will give you a little breather and will allow you to pay the maximum of your loan amounts swiftly and efficiently. Also, if you are someone who pays his/her debt off quickly, you can save on interest rates too.
Tips to Consolidate your Debt
- Calculate the total debt that you owe
- Calculate how much amount you can pay off quickly on your monthly repayment
- Based on this calculation, contact a lender that fits your budget
- Apply for credit with the lender
- Once you receive the credit, repay your old loans
- Start repaying the new credit as per the term and conditions with the lender
Secured Vs Unsecured Loans
Debt consolidation can be done for all types of secured and unsecured loans.
Secured loans are taken using a property or an asset as collateral. This means that you need to repay your loan to release the collateral. If you don’t repay the loan amount as per the agreement, the lender has the right to take over your collateral property or asset.
Secured loans consist of: Car finance, secured personal loans, business loans, secured cash loans, personal asset secured loans
Unsecured loans on the other hand don’t require you to put a property as collateral. Therefore, these loans have higher interest rates for the borrower and higher risk for the lender.
Unsecured loans include student loans, credit card loans, short term loan, medical bills, and unsecured personal loans.
Methods of Debt Consolidation
When it comes to different methods of debt consolidation, South African lenders give you numerous options. They calculate your debt size, your income, and credit score for determining the credit amount.
Let’s look at a few different methods of debt consolidation:
- Debt Consolidation Loan
This is one of the best ways to pay your old loans. The debt consolidation loan is a specific type of loan that you can use to pay your old loans over the years with the lowest interest rates. And the best part, you don’t need a guarantee or collateral!
A registered South African lender can give you a debt consolidation loan up to R250,000 with interest rates as low as 15%. You only need to pay a small processing fee.
- Secured Personal Loans
If you want to get a large amount of credit, apply for a secured personal loan. You will easily get this loan even if you have a low credit score.
All you need to do is have a property or an asset as collateral.
- Credit Card Balance Transfer
Another method for debt consolidation is transferring your balance debt amounts to credit cards, especially a new one.
A new credit card has promotional interest rates which are as low as 0%. You can transfer your balance to such credit cards for low interest. Although, once these promotional interest rates expire, you have to pay standard interest rates.
So, if you are planning on paying your debt quickly, only then opt for this method.
- Home Equity Loans
If you have equity in your home, you can use this to borrow credit from a lender. Using this credit you can repay your old loans.
But make sure to pay your home equity loans on time because if you don’t you can lose your home.
Debt Consolidation Loan Vs Personal Loan
Technically, debt consolidation loans and personal loans are not so different. You can get a personal loan for debt consolidation because personal loans can be used for anything.
But debt consolidation loans are specific types of loans given by lenders for paying back your old loans. You can certainly choose what you want based on your needs.
Advantages of Debt Consolidation
- Manage your debts easily
- Decrease your instalments and get a breather
- Easy management of your debts will keep you away from being a high-risk customer
Disadvantages of Debt Consolidation
- Won’t help you if your debt is too much
- You might have to pay higher interest rates
- Doesn’t make your debt disappear or fix them
Factors to Consider before Debt Consolidation
Although debt consolidation is a great way to manage your old loans, you have to be smart to create a plan that works. Here are a few things you must consider before opting for debt consolidation:
- Can you manage the instalments? If you have taken a personal loan for debt consolidation, make sure that you can manage your monthly instalments.
- What is the size of your debt? Calculate the size of your debt accurately. This is the only way to understand how much credit you can get that you can manage.
- Are you able to reduce the size of the debt? This is possible only when you cut on expenses and pay your debts.
- How is your credit score? Having a good credit score will ensure that you have lower interest rates on the personal loan. Otherwise, it can get difficult for you.
Requirements to apply for a debt consolidation loan
Whether you want to apply for loan online or in the nearest bank, the following are the requirements:
- Proof of bank deposits of salary for last three months
- Proof of income
- Age should be 18 years or above
- Proof of residence
Debt Consolidation: Frequently Asked Questions
- When is the best time for initiating debt consolidation?
If you find that your monthly bill payments are more than you can afford, you must get debt consolidation.
- How does debt consolidation work?
Debt consolidation combines all your smaller loans under one account. This makes it easier for you to repay your debt.
- Do I have to settle my debts or will the lender settle them for me?
If you have credit from a lender that handles debt settlement, the lender will settle it on your behalf. But if you have taken a personal loan, it is your responsibility.
- How do I know that I qualify for debt consolidation?
Based on your income, credit score, and other factors, your eligibility for debt consolidation will be determined. Don’t forget to compare different lenders to find the best one.
- Debt is someone else’s name. Can I consolidate it?
No! You can consolidate a debt that is in your name only.
- Can I improve my credit score with debt consolidation?
Debt consolidation will improve your credit score in the short term. But if you want to improve your credit score, in the long run, don’t default on paying your debts.
If you want to know more about debt consolidation loans or short-term loans, get in touch with us at Snappy Loan. We are a premier website in South Africa that will connect you with the right lenders in the country