For some lockdown has forced some welcomed income saving. For others though, particularly those who have lost their primary source of income or seen it reduce drastically, racking up the debt has become a habit difficult to break, even with the available relief funds.
If one were to search ‘debt consolidation’ on any browser, the chances are good you’ll get a lot of contradictory information, from links suggesting it is the root of all financial evil to ads that claim it is the solution to all your money problems.
Of course it’s not as simple as either the critics or supporters suggest.
According to Shafeeqah Isaacs, the head of consumer education at financial services provider DirectAxis, debt consolidation isn’t for everyone, but may be a useful tool to get your financial affairs under control, particularly if you’re feeling stressed about dealing with a complicated financial situation in uncertain times.
Before busting some of the myths about debt consolidation a good place to start is understanding what it is. The simplest explanation is that it involves taking out one loan in order to pay off a number of smaller debts. Critics argue that the only real advantage of doing this is that rather than having a whole lot of smaller creditors to manage, you have one large one.
Isaacs argues that while this is true, there are potentially some other benefits, such as:
- Consolidated loans usually having fixed interest rates making it easier to budget and manage one’s financial affairs.
- Having only one loan to repay suggesting that you’re less likely to miss payments, something that could impact your credit rating
- Saving money on service fees and credit life cover costs
- Improving one’s cash flow by requiring smaller payments, over a longer period (Depending on how the consolidation loan is structured, although you do need to bear in mind that you will be paying interest over a longer term too)
If you do find yourself in the fortunate situation where the loan frees up some additional cash each month, either use the extra money to repay your loan faster, spend it wisely or put it in a savings or investment account.
Another myth is the perception that debt consolidation is only for people who aren’t able to manage their money properly.
This simply isn’t true. Consolidating your debt is a financial tool that’s used by businesses and many financially savvy people to simplify their financial affairs, save on certain costs and free up cash.
Isaacs suggests that if you are considering debt consolidation as a means of managing your debt, you can use this account consolidator tool to decide if it’s an option that might work for you.
Here’s to a pandemic-related debt recovery!