Careful consolidation can resolve your debt woes

If you have racked up a lot of debt on credit cards, loans and overdrafts, then you may need a quick-fix solution.

While debt consolidation can be the answer, it can also create more problems if you do not address your spending.

Consolidating your debts or refinancing – as the banks call it – allows you to merge all your debts into one loan. So whether it is an outstanding car loan, a personal loan or an overdraft, a bank will offer to merge these debts into one balance, which you can then pay off.

It sounds like a dream solution to all your money woes as all your debt is now in one place, which should enable lower, more manageable payments.

Emirates NBD, for example, offers consolidation loans of up to AED800,000 for expatriates at a reducing rate of 6.66%. UAE Nationals can borrow up to AED3million at the same rate.

Commercial Bank of Dubai (CBD) offers specific products to settle liabilities at a reducing rate of 6.50% for both expatriates and UAE nationals. The maximum loan amount for expatriates is AED700,000 and for UAE nationals it is AED2million.

While refinancing looks good on paper – it only helps those who will then adopt a sensible approach to their finances.

BE SMART WITH MONEY

There’s no doubt turning high-cost credit into low-cost debt is a good way to free up some cash for your everyday expenses, but if you then spend that cash and incur more debt, you will end up in more trouble.

And there are other pitfalls to consider. You need to ensure the deal you are getting on your new loan is really better than the situation you were in before.

Yes, you might have lower, more manageable repayments but your new loan provider may extend the term you repay that debt over a longer period. So while it gives you more money in the short-term, you will pay much more in interest payments.

Also, check the rate. You need to ask the loan provider if it is a flat or reducing rate because there is a difference and personal loans can be advertised in both.

While flat rates are usually lower – they might not be the most cost-effective option, because they are calculated on the whole loan, whereas a reducing rate is calculated on the outstanding balance so compare like for like.

Another aspect to consider is the fees. There may be an upfront fee to pay or an administrative or ‘arrangement’ fee for processing the refinancing. This is typically 1%.  Some banks also charge early repayment fees – again often 1% – while others do not, so shop around for the best deal.

Finally, remember that a debt consolidation deal is often just a marketing gimmick for a standard personal loan.

Most personal loans – if you get approval – allow you to refinance existing debts. However, some banks are stricter on this matter than others. Whatever your loan is called, just make sure you compare all the personal loans available in the market and not just depend on the consolidation offers for your right deal.

Ambareen Musa is the founder and Managing Director of the online comparison website souqalmal.com