Getting Out of Debt During a Crisis

The current health crisis has definitely changed our lifestyle and financial stability. 

According to the recent Consumer Pulse study conducted by TransUnion in April 2021, 93% of Philippine consumers reported that their household income is negatively impacted and that almost half or 47% are expecting that they won't be able to pay at least one of their current loans or bills in full. 

Despite being more prudent with personal finances such as expenditure cuts, many are still experiencing financial difficulties. This is brought about by the continuing slow business activities and the loss of jobs or reduced working hours. 

Unavoidable expenses such as needing to buy gadgets in order to cope with digitalization (e.g. kids need a computer to attend online classes or individuals to start working from home) also contribute to these challenges. In the worse cases, some households face a huge financial burden due to hospitalization (e.g. family member got infected and has no insurance coverage) 

If not managed properly, these situations will not only add up to more debt but will be creating a domino effect causing missed mortgage and missed payment of car loans, credit cards, and bills. 

What can you do when you are having a hard time managing your debts? 

Debt consolidation is one solution if you are having a hard time managing your debts. In a nutshell, it is the act of taking out a single loan to pay off multiple debts. It is a strategy to combine all debts into one helping you keep track of payments and balances. 

What are the benefits of debt consolidation? 

1. Streamlined Payments and Due Date

Since you no longer have to make separate payments for each debt, you only have to think of a single payment due date. This decreases the chance to overlook payment deadlines which may incur penalties. 

It will also give you a better insight into your repayment timeline. 

2. Lower Interest Rates

In most cases, the lender will also offer a more competitive interest rate to entice borrowers to opt for debt consolidation. This is very common for credit card companies that offer balance transfers (which is one form of a debt consolidation) 

Is debt consolidation recommended for everyone? 

Generally speaking, debt consolidation is beneficial to the borrowers. However, here are some important points that you should consider before making that decision. 

1. Compare if the interest rate offered is lower than the current interest rate that you are paying. 

Aside from the interest rate, make sure to consider other related costs such as loan origination fees, balance transfer fees, closing fees, annual fees, or pre-termination fees. There are instances that the interest rate is lower but after adding the balance transfer fees, it may not be worth taking a new loan. 

2. Check that you have adequate cash flow 

When taking out a new loan, make sure that you have adequate cash flow in that way you can ensure that you meet the monthly payments. If your cash flow is not enough, you might want to stick to having smaller loans/ payments which are easier to meet than coming up with a large sum of money altogether.

3. Understand this will not erase your debts

Debt Consolidation will not solve your financial problems. Instead, this allows borrowers to have little breathing room when drowning in debts. 

It is important to understand that the end goal is to get out of debt and not be trapped in the vicious cycle of getting a loan to pay off another loan. 

So, if you feel that debt consolidation is the best option for you, click here to learn more.