In an inflationary environment, millions of people are struggling with a myriad of debts, from rental arrears to credit cards, personal loans and buy now pay later accounts. It’s easy to become overwhelmed by the struggle. Debt consolidation can be an excellent strategic way to reduce your overall interest payments and this is what we’re going to examine in closer detail below. So, for your convenience, we’ve extracted and consolidated debt management advice supplied by South Africa’s industry leading online credit provider Wonga Online Ltd. You can read their full debt management guide here. Their post includes a free PDF guide to the ‘snowball’ debt consolidation method that is well-worth a download.
Credit Card Debt Consolidation
Credit card debt can – literally – be impossible to escape from, where you have several cards, all attracting interest rates and fees, with repayments never seeming to make a dent. Consolidating credit cards is simple and effective and especially worthwhile if you can find an introductory interest-free deal.
The caveat is that you need a new account with a sufficient balance to repay every other card, but one repayment is easier to manage, and a lower interest rate will immediately mean the cost of servicing your debt falls.
Worried about the temptation to keep spending on your new card until you’ve maxed out the limit? Consider a balance transfer agreement or a credit card consolidation account designed to help repair bad credit – or make sure the physical card isn’t in your wallet, giving you an easy reason to spend on non-essentials.
Taking Out a Debt Consolidation Loan
Loans can be a good way to reduce the APR you’re paying because a longer-term personal loan normally has a fixed interest rate and charges less interest than a credit card. Knowing what your monthly payments will be helps with budgeting, and you can set up automated direct debits, so you keep pace with the repayments.
Although a personal loan over, say, five years may take longer to repay; it’s highly unlikely that the total costs will be anywhere close to the interest rates charged on credit card debt.
Releasing Home Equity to Consolidate Debts
If you own your home and have built up equity, re-mortgaging or increasing your mortgage balance to cover the cost of all other debts is a good option.
Mortgages charge much lower interest than credit cards or loans, and because repayment terms span several years, the repayments are also likely to be substantially reduced.
There are downsides, and you may need to pay for a valuation to be able to proceed, but you may be eligible for a re-mortgage at a fixed interest rate even if you have a low credit score, provided you have more than enough equity to offset the lender’s risk.
Debt Management Plans
Known commonly as a ‘DMP’ – this has fixed monthly payments, does not affect your credit score, and can reduce your interest costs by as much as 50% in some cases. Although it usually takes between three and five years to repay, a DMP rolls up debts into one account with a discounted interest rate to help make repayment more realistic.
If you have found that you don’t qualify for other consolidation loans, a DMP could be the most suitable solution, although you normally need to show that your debt does not account for over 40% of your total earnings. The rules around DMPs vary depending on which country you’re from so be sure to do the proper research before following this avenue.
Remember to stay positive and remain pro-active. Taking the first steps to managing your debt are some of the most difficult but addressing the problem head on and communicating frequently and transparently with creditors is going to help improve your situation. Good luck.