If you are a cash-strapped person facing mounting debt, you may have heard the term debt consolidation thrown around. You may have even considered it. But what you don't know is that you might not understand it.
Of all the financial plans available for people dealing with overwhelming debt, debt consolidation is probably the most valuable and the least understood. In fact, you may already believe some of these common myths about debt consolidation.
In setting out to verify the myths, we interview Mr Theuns Hanekom CEO of Blue Oak Systems, which is an accredited Credit Bureau with the NCR and whose firm has designed and built the first automated debt consolidation product for the South African market – RESET NOW (www.resetnow.co.za)
Myth #1 Debt consolidation is the same or similar to debt management and debt review.
"Truth - Debt consolidation is nothing like those other programs. In truth, it is not so much a "program" (you can even do it on your own, if you know enough) but more of a strategic approach.
In debt consolidation, you lump all of your debts together and repackage them. There are no legal implications, nor is it recorded anywhere that you have made use of the debt consolidation process, to better your cash flow position."
Myth #2 Debt consolidation reduces your debt.
"Truth - No, it doesn't. If you owe a total of R 80,000 on several credit cards and loans and you consolidate that debt, you still owe R 80,000.
Debt consolidation does not re-negotiate, settle, write off, or reduce any of your debt. So why then consolidate?
If you have a lot of loans at high interest rates, repackaging those higher-interest debts into one larger loan at a lower rate reduces your interest and the amount you have to pay. This means you can either pay less a month or (even better) pay the same amount but get the debt paid off sooner."
Myth #3 Debt consolidation will hurt my credit score.
"Truth - Done properly, debt consolidation will not impact your credit score or credit report negatively. In fact, debt consolidation may even improve your credit score! That's because you'll be paying off a bunch of smaller loans and any time a loan is paid in full, that helps your credit score."
Myth #4 Debt consolidation requires getting help from an outside agency or a lawyer.
"Truth - While there are companies and counsellors in the marketplace who will help you consolidate your debt or enrol you in a debt consolidation program, you can also consolidate debt on your own.
Of course, if you want to consolidate your debt on your own, you have to know a bit about how to do it and what the options are, and it is here that we saw the need for RESET NOW.
It can definitely be a do-it-yourself project for people good with money (or who are willing to learn enough to get good with money).
Debt consolidation is also not necessarily visible to outsiders. Your bank, the credit bureau, and other parties may not even be aware that you have consolidated debt."
Myth #5 Debt consolidation is something for financial losers and lightweights, not for people who know how to manage money.
"Truth - This is the most far-out myth about debt consolidation. Debt consolidation is a principle that is used in business and by the super-wealthy all of the time. It is a way of organizing and structuring your debts in a way that is most advantageous to you."
Myth #6 Debt consolidation is just robbing Peter to pay Paul; you're just getting more debt!
"Truth - Debt consolidation is indeed a way for you to pay off one debt by getting another debt. But not all debts are equal.
As an example, let's say that you owe R10,000 on your credit card and the interest you have to pay is 26% interest. For example, let's suppose that I source a loan of R 10,000 at 22% interest. While both debts are still in the amount at R 10,000, the debt at 12% interest is a better deal for me. I won't have to pay as much per month or, if I make the biggest payments I can, I can pay it off sooner."
Myth #7 People who consolidate debt just wind up digging themselves in deeper in debt!
"Truth - It is absolutely possible to consolidate your debt and then keep spending and get yourself in a big mess. That's why you need good information and a plan to pay off your existing debt, manage your finances now, and start planning for your financial future.
There is no reason that debt consolidation cannot work to get you out of debt for good, but you must have a plan, one that you allows you to understand how much you need to consolidate, to allow the maximum cash flow saving. One that provides a list of which debt to settle – the correct ones. In the past though a person would have to explain their financial positions, which could prevent someone, who simply wants to understand the benefits of using debt consolidation themselves. That situation no longer exists – you don’t have to explain yourself to some agent on the phone, or send through personal documents, to persons unknown or apply directly to a lender, just cause you wanting to understand the benefits of debt consolidation and whether it is the right choice for you.
Mr Hanekom states further "With RESET NOW available to all persons wanting to understand their debt and how to go about understanding their monthly cash flow savings, it removes the entire process of explaining yourself – RESET NOW, is the only automated Debt Consolidation which asks a client a very basic set of information, to draw your credit report and analyse it and provide a report that shows you your saving, as well as the creditors to address."