A local comedian posed a question to his Facebook followers the other day and asked ‘What is the one thing you have too much of?’. The funniest and probably most honest response was one word. It was simply, ‘Debt’.
The sad reality is that debt is not a joke and if the honesty of this followers response is uncomfortably familiar, keep reading.
Not being able to repay your debt is a grim truth for many South Africans. You are not alone and you have options.
One solution that many South Africans turn to is a debt consolidation loan. Let’s look at what a debt consolidation loan is and explore whether it is the best option.
In layman’s terms, a debt consolidation loan is a loan that consolidates your debt, therefore it is a form of debt refinancing which allows you to combine multiple debts under a single loan so that there’s just one new repayment and creditor that is owed.
The one payment usually has more favourable repayment terms such as:
Now, depending on your circumstances, this may sound like great news, and you might be starting to consider consolidating your debt with a loan but stick with us. There might be another option that is more suited to your needs.
A debt consolidation loan is a loan that is issued by a financial institution or reputable lender that bundles various debts together under a single new consolidated loan. To consolidate means to combine, therefore, a debt consolidation loan combines various debts under a unified loan.
This means that the borrower is only liable for one monthly repayment to the consolidation loan lender rather than multiple credit accounts, previously held with the various creditors.
These are the steps:
There are two types of debt consolidation loans:
A secured loan
In the unlikely event that you are unable to repay the loan, this type of debt consolidation loan will use your assets as collateral.
An unsecured loan
This type of debt consolidation loan does not require collateral. It is however harder to obtain.
Either way, both types of debt consolidation loans offer better repayment terms compared to multiple monthly debt repayments to various creditors.
Factors that determine the loan amount, interest rate and length of the loan are:
It is important to note and be cognisant that, as with any loan, you are not only paying back the amount you borrow, but the additional sum of interest accrued on the borrowed amount.
So keep the interest rate of your loan in mind.
The interest rates on debt consolidation loans generally range between 5.99 percent to 35.99 percent. You are going to want to find the lowest interest rate as this will result in a bigger saving. If you’re not careful, you could end up with very unfavourable interest terms. In which case the loan will cost you a lot more money and put you at greater risk of defaulting.
Financial institutions typically use the same criteria to determine interest rates, but they do compete with each other, so you could get a better deal if you do your research.
Any step you take towards consolidating your debt is a step in the right direction.
A debt consolidation loan can be beneficial in the following ways:
Furthermore, the immediate sense of relief you feel knowing that you are on your way to a debt-free life, is well, priceless.
Here’s an example of how a debt consolidation loan works:
Keep in mind that there’s more than one way to consolidate your debt. You could get the same results by applying for debt review. Which many consider to be a much safer option.
Let’s look at a scenario.
You have three credit cards and you owe a total of R20 000 rand at an annual rate of 22.99% compounded monthly. (What is compound interest? Compound interest is interest earning interest on interest on interest.)
To reach an R0 balance, you need to pay R1047.37 a month for 24 months. This equates to R5136.88 paid in interest alone during this period.
Now if you consolidated the three credit cards with a loan that had a lower interest rate of 11% annual rate compounded monthly, you would need to pay R932.16 a month for 24 months to reach the R0 balance. Saving you a whopping R2371.84 in interest.
| Loan details | Credit Cards (3) | Consolidated loan |
|---|---|---|
|
Interest % |
22.99% |
11% |
|
Payments |
R1047.37 |
R932.16 |
|
Term |
24 months |
24 months |
|
Bills per month |
3 |
1 |
|
Principal |
R20 000 |
R20 000 |
|
Interest |
R5136.88 |
R2765.04 |
|
Total |
R25136.8 |
R22765.04 |
These are the types of debt that are most commonly consolidated (but not limited to):
As with everything, there are risks associated with a debt consolidation loan. Here’s what you need to take into account when considering a debt consolidation loan.
1. It addresses the symptom and not the root cause of the problem
Bad financial habits are what leads to snowballing debt. Taking steps to eradicate your debt is a step in the right direction. It is important to investigate how these bad habits were formed and then take steps to escape the cycle of bad money habits.
2. A debt consolidation loan is essentially applying for more credit to pay off your existing debt which again, does not address the actual problem of bad financial habits.
3. If you have a secured debt consolidation loan, you run the risk of losing your assets.
If you are uncomfortable with the risks that the process poses then consolidating your debt with a loan might not be a good idea, here are some alternatives you can consider.
By now you have a pretty clear understanding of what a debt consolidation loan is, let’s look at the alternatives.
As a homeowner, you can access the equity in your home to provide a reusable source of financing to pay off your debt. You can choose to either use all or a portion of the total credit limit as you need it. You will only pay interest on the amount you use.
Debt review (or debt counselling) has many benefits that can help you catch up with your debt. This process consolidates your debt and simplifies the repayment process by negotiating better repayment terms with your creditors and reducing your monthly repayment amount (amongst other things).
Most individuals consider Debt review to be the safer option since there is no loan involved. Therefore, if you’re looking for a more secure way to simplify repaying your debt, then this might be the way to go.
We have a whole post with a deeper comparison of debt review and debt consolidation loans, check it out to compare these options.
Most finance institutions have streamlined the application process. But remember, the interest rates differ based on the criteria we discussed above.
To ensure that you are making the best choice, make sure that it is an informed decision.
Here are a few lenders that offer debt consolidation loans.
Keep in mind that we’re not affiliated with, or necessarily recommending any of these institutions, we’re simply sharing a few reputable options for you to explore.
The safest way to break the debt cycle is to make use of a process that offers you the security that you need. With this in mind, it is worth mentioning debt review once more.
Our team can help you to get started with the debt review process, answer all of your questions, help you to consolidate your debt, reduce your monthly repayment, and protect you from desperate creditors – visit our homepage to apply for debt review instead.
Now that you have a thorough understanding of what a debt consolidation loan is, how it works, and what the risks could be, you can start looking for accredited debt consolidation loan providers in South Africa if you believe that it is the best option for you.
African Bank allows you to choose 5 of your most critical loans and consolidate them to the value of R250 000.
Bonus: Take a break – African Bank offers a one-month payment break.
The consolidated loan that Old Mutual offers will bundle all your debt into one single loan. As you know, a single loan reduces the admin of multiple repayments and gives you more time to pay off your loan at lower instalments.
Make sure that the terms of your consolidation loan don’t put you at a disadvantage. Ridiculous interest rates add up over time and could do more harm than good. Check out the other debt consolidation options available to you before you commit.
If you have a good credit record and earn more than R5000 a month, you can qualify for a consolidation loan at Direct Axis.
Liberate yourself by taking the first step towards obliterating your debt.
Talk to a debt expert for some practical advice from someone who has helped thousands of South Africans with their debt. Debt consolidation loans have their place, but for most, the risk outweighs the reward and it could get you into more trouble than you started in.
We love helping South Africans to become debt-free and move on to financial independence, and we’d love to do the same for you.
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.