Debt consolidation is a phenomenon which has swept through financial markets for a while now. This credit management system allows individuals who are financially distressed due to debt or even at risk to have a better way of managing debt. Debt consolidation allows one to seek a loan from a financial institution which pays off various credit accounts leaving the individual with only one debt account to service.
This plan offers clients a number of benefits such as going from having numerous creditors and credit agreements, with various terms, interest rates and monthly fees to one loan with one creditor and being liable for one monthly fee. Consolidation loans also quite often offer lower overall average interest rate over a longer loan term which results in lower monthly debt repayment.
It is however important to highlight that debt consolidation loans have their own negatives. Customers should understand that consolidation is a short-term fix, not a life time solution. In a layman’s language, it’s more like putting a plaster on a serious wound. While debt consolidation loans extend the repayment period, it simply means the debt is being extended to a longer period of time which results in paying much more interest on that debt.
It therefore means that reaping the benefits requires financial discipline. It requires the adoption of better spending behavior to avoid falling into the same spending patterns which created the initial over-indebtedness. Debt consolidation loans should be used to save on interest and not to reduce your longer term monthly debt repayments.
Customers should also go through a brief checklist to ensure debt consolidation loan enables them to settle all debts, it reduces overall average interest rate, it reduces monthly repayment, the credit life insurance on the loan should cover death, disability and retrenchment.
The negatives of debt consolidation can be drastically minimised if matched by disciplined spending habits and prudent financial management.