In the UK, the US and in Europe debt consolidation has long been considered a sensible financial solution for people who have over-extended themselves and find themselves unable to meet their monthly payments.

The concept is still comparatively new in South Africa, but the rise in the number of people who are able to access credit combined with the increase in the cost of living means that many of us are perpetually in debt, often ‘robbing Peter to pay Paul’ in the struggle to keep up with payments on bonds, store cards, credit cards, pharmacy bills, overdraft fees and more. Under these conditions the possibility of consolidating all those debts is very tempting.

But what is debt consolidation exactly? First of all let’s be sure we understand what we mean when we talk about debt. In this context debt refers to those accounts which are left unpaid at the end of the month because you have run out of money; it means the balance which continues to grow on your credit card while you battle to pay the monthly interest, or the second and third credit cards which you juggle, using one to pay the other.

If you can afford no more than the minimum monthly payments to service your debts you will do little more than cover the interest and skipping the odd payment will add late charges to the original bill which will, in turn, increase the interest charged. Unfortunately, other than declaring bankruptcy, the only way to become debt free is to pay what you owe. This, of course, you are unable to do, which is why you got into the mess in the first place!

One way to overcome this problem of ever-increasing debt is through debt consolidation.

Debt consolidation involves combining all your smaller, individual debts into one big, all encompassing debt. In other words, taking out a loan which will enable you to pay off everything else you owe and leave you with just one payment to meet every month. While taking out another loan in order to pay off the loans you already have might seem a strange and even risky tactic, it works as long as the following criteria are in place: firstly, the new loan you negotiate should carry a lower interest rate than those you already have and, secondly, the new loan should give you a longer repayment term.

Currently, in South Africa, the most popular way to achieve this is to increase your home loan and use the extra money this releases to pay off all other outstanding debts. By doing this all your other debts are cleared and you are left with one monthly payment which should be considerably lower and attract less interest than the combination of the smaller amounts you owed previously.

Debt consolidation, then, is one method of freeing yourself from the burden of owing money to numerous creditors and replacing it with a more manageable monthly payment which will eventually lead to you being completely debt-free.