Learn More AboutManaging Your Debts with Debt

Consolidation

Table of Contents:

• What is Debt Consolidation?

• What makes Debt Consolidation preferable and When?

• When should Debt Consolidation be avoided?

• Decide Better: Know the Ups and Downs

What is Debt Consolidation?

Debt consolidation is the clubbing of all forms of outstanding debt to form one total outstanding amount. This can then be paid off through one mode of finance, usually a loan. Many people find it hard to manage debt; either tracking or making payments. Some take on debt at a time when they are financially sound or assume a rise in income will help pay-off dues over time. However, unfortunate adverse financial conditions can affect credit servicing abilities. Still others may simply have availed credit at a time when credit was generally expensive and with more economical offerings available over time look to refinance loans.

Debt Consolidation Loans are a form of refinance whereby borrowers can source funds to pay off outstanding debt at a more affordable interest rate and save money.

Let’s consider this with an example. Suppose you have outstanding debt attributed to an education loan of AED 5 lakhs @ 10% p.a. payable over the next 5 years and a car loan of AED 7 lakhs @ 11% p.a. also payable over the next 5 years. The EMI on your education loan = AED 10,624; EMI on your car loan = AED 15,220 Total EMI = AED 10,624 + AED 15,220 = AED 25,844 Total amount due over the next year = AED 10,624 * 12 + AED 15,220 * 12 = AED 127,488 + AED 182,640 = AED 310,128 Suppose you decide to go for a personal loan (i.e. a debt consolidation loan) of AED 3 lakhs @ 15% p.a. for 5 years to pay off both these loans. This will translate into an EMI amount of AED 7,137 per month and AED 85,644 for one entire year. Thus, your savings over the next year by refinancing your existing loans with a debt consolidation loan = AED 310,128 – AED 85,644 = AED 224,484

The same principle can be applied to outstanding dues on multiple credit cards. If you max out your cards or can’t pay dues in time, you will be charged interest on balances outstanding. By paying off these dues with another credit card or a loan at a lower interest rate, you save money.

What makes Debt Consolidation preferable and When?

There are three major points that make debt consolidation positive for customers under multiple forms of debt. • High interest rates can be done away with.Debt consolidation is a positive move if existing rates of different debts owned by an individual are higher than the loan that he/she can to avail on a debt consolidation loan. This is subject to favourable terms and only when savings are substantial.• High monthly payments can be avoidedSince high rates of interest can result in high EMIs, large monthly repayments can be avoided by consolidating and paying off debt via credit availed at a lower rate.• Confusion caused by managing too many bills can be minimizedHaving too many EMIs and/or bills to be tracked can result in missing payments or can even lead to non-payment. Consolidation of debt can eliminate this risk. However, debt consolidation is not a magic wand that can eliminate all debt-related troubles with one touch. As with most financial instruments, debt consolidation, too, has its pros and cons. While it might work like a charm for few people, others might do better without it.

When should Debt Consolidation be avoided? Although debt consolidation might sound like saving grace when faced with all kinds of debt trouble, it might not always be a good idea. Here are a few situations wherein consolidation of debt might not be a favourable move. • If you’re concerned about your credit score then debt consolidation might not be a good idea. Almost

all debt consolidation instruments can impact your credit score negatively. However, if this hit on your score isn’t as bad as the hit it might have taken from non-payment on existing debts, it might be worth it. No pain, no gain!

• If you’re borrowing money against your house then debt consolidation might not be a preferred

move since, although the rates might be much less, the loan would be secured against a very valuable asset - your house. Any failure to clear your debt consolidation loan would land you in bigger trouble.

• If you don’t alter your spending and repayment habits, debt consolidation might not work out very well for you. Debt consolidation may get you out of a pickle but poor financial management will always leave you in a jam. An unsavoury one at that. Once you’ve paid off your dues, ensure you don’t let debt pile up again.

If you have not done thorough research regarding debt consolidation, it might not yield the best results. Knowing all the pros and cons of trying to consolidate your debt is necessary to make it work for you. Understand all terms and conditions attached with the new as well as existing loans, especially interest rates and repayment schedules and pre-payment penalties. Do your math!

Decide Better: Know the Ups and Downs

Consider Avoid Forget

High interest rates can be done away with

Affects credit score Poor financial management. Not your cup of tea!

High monthly payments can be avoided

If borrowing against house.

Too many bills can be minimized

If you still can’t decide if it’s the right option for you, seek help. Many financial counsellors provide services with regards to consolidation and elimination of debt. Debt consolidation may sound like a charm, but to get it to work like one, you should know how to use it wisely. Research is the first step towards deciding to opt for it but proper application is the only way it can help you out of the vicious circle of debt.

THANK YOU!