Debt consolidation is an act of taking out a new larger loan to pay off smaller multiple loans. The goal with debt consolidation is simply to roll all your different loans or credit card payments into one single payment. This can be at a lower or higher interest rate depending on your credit score. Here is the deal, debt consolidation makes sense when you end up having a lower interest rate than you were paying before and shorter term. A lower interest rate isn’t always a guarantee when you consolidate.
Before you apply for that debt consolidation loan, there are really important things you need to know. Most importantly that debt consolidation isn’t right for everyone.
Listen closely, most of the time, after someone consolidates their debt, the debt grows back. Why? They don’t have a game plan to pay cash and spend less. In other words, they haven’t established good money habits for staying out of debt and building wealth. Their behavior hasn’t changed, so it’s extremely likely they will go right back into debt.
When getting a debt consolidation loan doesn’t make sense our debt counsellors need to be negotiating with your creditors and arrange a manageable repayment plan on your behalf. Debt review allows you to benefit from:
To learn more about debt counselling visit our debt counselling page.
There are two types of debt consolidation loans:
Table below summarises facts about debt consolidtion loan vs debt review. But here’s the deal, debt consolidation promises one thing but delivers another. Here’s why you should skip debt consolidation and opt instead to follow a debt review plan that helps you actually get rid of debt fast.
|DEBT CONSOLIDATION LOAN||DEBT REVIEW|
|Consolidates all your debts into one, with the need to take out one bigger loan||Consolidates all your debts into one, without the need to take out one bigger loan|
|There is no legal protection of assets since there is no court order in place. If its a secured debt consolidation loan against your home you can lose your home if you miss repayments.||Your assets are legally protected while under debt review in the form of a court order|
|The bigger loan granted to pay off the smaller loans is limited||The amount of debt included under debt review is unlimited|
|One of the prerequisites to qualify for the loan is having a good credit score||Credit scores are not required to qualify for debt review|
|Makes sense when the interest rate that you pay for the consolidation loan is lower than you were paying before.||Interest rates are lowered and amount of debt decreases|
|Lower monthly installment||Lower monthly installment|
|Household expenses are usually not covered||All household expenses are covered. The repayment plan prioritses covering all household expenses and the balance is channelled towards paying your debt|
Debt consolidation doesn’t mean debt elimination
|The fact that you cannot borrow while under debt review means that you are eliminating debt when you pay your debt.|
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