FINANCE

The five Ws and the H of debt consolidation

Wednesday 25 March 2015, 3:28PM
By Harold French
387 views


Debt consolidation is a term commonly seen and heard on radio and television. However, those quick mentions of the concept don’t necessarily provide a suitable explanation of exactly what is meant by debt consolidation. Here’s a handy guide which provides a fuller definition – and helps you understand how to go about it when and if debt consolidation is necessary for your financial affairs.


What
As implied, debt consolidation means taking all your debts and lumping them into one single debt. Conducting a debt consolidation exercise therefore requires you to do something which may seem counter-intuitive: take out a new loan to pay off existing debts.

Who
You, of course. The cost of living and the unpredictability of modern life means sometimes things can get a little out of hand, including debt. Don’t let it get you down, do something about it – debt consolidation could be the answer.

Why
Debt consolidation is a good idea if you have several relatively small debts, particularly if it is difficult to keep track of them, service (pay) them on time, or if those loans are at high interest rates. By putting all your debt into a single loan, you make just one repayment each month. If the interest rate is lower, and if the period in which the loan is to be repaid longer, it can be a lot easier to cope with your debt.

When
Consider debt consolidation if you are having difficulty keeping up with your debt repayments. Keeping up means both the number of repayments you need to keep track of, as well as the sum of money required to pay those debts. If you are falling behind, debt consolidation may be a tactic to take back control.


Where
Accessing finance isn’t particularly difficult, particularly if your credit history is good. Many credit providers – such as GE Money – will provide specialised loans for debt consolidation. Be sure to choose a reputable lender and be upfront and honest with them. They can only help you get out of debt effectively if they know the facts.


How
Doing a debt consolidation is a relatively straightforward exercise addressed either by opening a new credit card account or by accessing a personal loan. It is also possible to access equity in your mortgage, should you have one.


A credit card account is perhaps more risky and more expensive (credit account interest rates tend to be higher than those of a personal account). There is also the risk of personal indiscipline: the credit card can provide access to more credit which is easily accessed, which can lead to more debt. If you do choose a credit card, look for one which makes it easy to buy expensive items with no interest; for example, Gem Visa automatically offers 6 months interest-free on purchases over $250.


Be disciplined!


If you are considering a debt consolidation exercise, perhaps the most important advice of all is to be disciplined. With your existing smaller debts paid off by the new loan, you will earn points towards a good credit history from those providers – do not be tempted into buying new things, borrowing more or accessing additional services.

 

It is easy to forget the pain of cascading debt when additional finance comes on tap, but that debt can very quickly become a spiral. Rather focus on eliminating existing obligations, with the help of the consolidation exercise, before spending any more on credit.