Debt Restruct

Is it a Good Idea to Consolidate Debt with a Loan?

Personal debt is a problem for many South Africans. According to the CEIC, South Africans have around R2.5 trillion of household debt as of March 2021. According to the World Bank, over 25 million South Africans owe financial institutions money and have some form of debt.

A 2018 survey by 1Life Insurance revealed participants spend 72% of their income on paying a debt. For example, if a survey participant earns R10,000 per month, they will only have R2,800 left to pay for food, clothes, and other necessities for daily living. 

Most people have debt from multiple financial institutions. Having this much debt spread between various creditors makes it more challenging to keep track of monthly payments and balances on all of these outstanding debts. 

To simplify the repayment process, many South Africans consider consolidating their debts either by applying for debt review or taking out another loan. The latter is known as a debt consolidation loan. In this article, we’ll tell you more about debt consolidation loans in South Africa, when you might consider this option, and why it might not be the best solution for everyone.


What is debt consolidation? 

To consolidate is defined by as “to bring together (separate parts) into a single or unified whole; unite; combine” And debt consolidation loan does precisely that; it is a loan that combines multiple debts into one new loan. Usually with different terms for repayment, such as a lower interest rate, a reduced instalment, and an extended term. 

You can get debt consolidation loans from a variety of financial institutions like banks or online lenders. When you apply for a loan to consolidate your debt, the lender bases your interest rate on your income, credit score, and other financial information. Most debt consolidation loans do not require collateral.



The Pros and Cons of a Debt Consolidation Loan

Before running to a lender to apply, it might be best if you considered the advantages and disadvantages that a debt consolidation loan presents first.

Debt review shares a lot of these benefits and has more advantages of its own, as well as other disadvantages. Take a look at the pros and cons of debt review to learn more.


Check to see if you qualify to reduce your debt instalment with our quick quiz

What are the advantages of consolidating debt with a loan?


Single repayment

The first benefit of a debt consolidation loan is combining multiple debts into a single loan with one payment. You can reduce your chances of making late payments or forgetting about making payments.


Lower interest rate

Debt consolidation loans typically have lower interest rates than credit cards and other types of debt. To compensate, the borrower usually extends the term.


There is a Pay Off Timeline

When you are approved to consolidate your debt, you agree to make payments on a set schedule. The pay-off timeline is typically three to five years, so you will know when you paid off your debt. Be aware that your lender may charge a prepayment penalty if you decide to pay off your loan earlier than scheduled. 


The disadvantages of consolidating debt with a loan – Why you might want to think twice.


It does not solve the underlying financial issues 

Debt consolidation loans do not address bad financial habits that might have lead you to become over-indebted in the first place. The best way to get out of debt is to pay back what you owe, not necessarily to use a new form of debt to “solve” the problem.

Instead, using a debt counselling service may be a better approach. Check out debt counselling vs debt consolidation to compare your options and make an informed decision based on your financial situation.


You might be putting your assets at risk 

In some cases, you may need to risk your personal assets as collateral to secure the loan. If you accept a secured loan, the financing company can take the assets you put up for collateral if you cannot make payments.



The Best Way to Become, and Stay, Debt Free

Now, you might still be wondering whether debt consolidation is right for you. Before you decide, consider your long term goal. Most South Africans struggling with debt want to escape the debt trap and become financially free.

Rather than getting another loan, and fighting debt with debt, we recommend that you contact a debt counsellor to learn more about debt review, which is specifically created to help over-indebted South Africans repay their debt once and for all. 

A debt consolidation loan can simplify your debt repayments, and for some, it is a favourable option – usually for consumers with lower total debt amounts. Make sure you understand the terms, have a plan to pay back the loan and control your spending to stay out of debt. Take your situation into account and choose the option that will get the results that you desire.

Now that you know whether a debt consolidation loan is a good idea or not. Make the next move; your financial future depends on you.

Do you know whether you qualify?

Find out if you’re eligible to reduce your debt and protect your belongings.

Disclaimer: This website and any information herein is not intended to be, nor does it constitute, financial, tax, legal, investment, credit, or other advice. Before making any decision or taking any action regarding your finances, you should consult a qualified professional directly.

Start managing your money better with Debt Restruct today