Debt Consolidation - Why it's not right for everyone
The meaning of debt consolidation:
South Africans who have difficulty paying their debts can combine them into one loan. In short, a debt consolidation loan is one large loan that will pay off smaller debts.
If you owe money to different places, such as credit cards, you may consider getting a loan. This loan will allow you to combine all your debts into one monthly payment
How does debt consolidation work in South Africa?
Like a personal loan, for a debt consolidation loan, you would need to apply for the loan. The lender will take your credit score and affordability into account. Once your loan has been approved, you can then indicate that you would like it used for debt consolidation purposes.
Is consolidating debt a good idea?
If you’re having trouble making ends meet every month and you’re looking for solutions on how to get out of debt fast, a debt consolidation loan can work for you.
When considering if this is a good option for you, keep in mind that consolidation loans do not cover secured loans. Secured loans, like car finance, are supported by an asset. It will cover unsecured debt such as credit cards, student loans, store accounts and personal loans.
Once you take out a consolidation loan you need to make sure you stop using the accounts that you are using the loan to pay back.
If you don't, you'll have more debt than before the new loan, which will probably hurt your credit score..
A few more costs to consider when taking out a debt consolidation loan
In South Africa, many companies offer debt consolidation or loans to consolidate debt. Before applying for a consolidation loan, however, it's important to note that taking out a loan, and the repayment of it, involves more than the capital loan amount and the interest rate.
There are often additional fees including initiation fees and monthly admin fees for the loan too.
How do I get a debt consolidation loan:
You will need to provide proof of income. The lender will want to ensure you have the financial means to pay back the loan.
You will need a good credit report. Lenders will check your payment history to make sure you have not previously fallen into arrears.
It’s important to note that each lender may have different qualifications or conditions.
Companies that offer debt consolidation loans in South Africa
Most banks can provide debt consolidation loans. Below is a list of a few credit lenders in South Africa that provide consumers with these loans. Many of these provide the option of applying online for these debt consolidation loans:
With Old Mutual, you would apply for a regular personal loan and once the consultant gets in touch with you, you can request that this loan be used for debt consolidation purposes. With Old Mutual's consolidation loan, your loan term can be between 3-72 months.
The requirements needed for this application are:
- Your latest payslip
- 3 months bank statements
- Need to be between the ages of 18-60
- Before deductions, earn more than R2500 per month
With DirectAxis you can consolidate your debts into a single loan and have one monthly installment. Below outlines some of the criteria needed to apply for a loan at Direct Axis:
- Proof of address
- Salary/ monthly income of R5000
- Good credit record
- 3 months banks statements
Your loan repayment terms (period of time you can pay back your loan) with DirectAxis are between 24 to 72 months.
It's important to note that a loan to consolidate your debt could end up costing you more money than your original debt in the long run. Let's look at an example that DirectAxis provides when applying for a loan:
If you take out a loan worth R50 000 with an annual interest rate of 28.75% for a loan term of 72 months. This is how you could work out your total costs for this loan:
Loan amount: R50 000
Interest rate: 28.75% per annum, compounded monthly
Once-off initiation fee: R1207.50
Monthly admin fee: R69
= R111 760.74
That's more than double your original debt amount.
At African Bank, when applying for a debt consolidation loan, you will need the following:
- 3 months banks statements indicating a regular income/salary
- You must be over 18-years-old
- Proof of your most recent income/salary slip
Does consolidation affect my credit score?
Yes. When you apply for a consolidation loan the lender will run a credit check. This will reflect on your credit record. Any new credit account is assumed as a risk by lenders.
There will also be a decrease in the age of your credit. Make sure you keep up with the repayments on time to ensure your payment history is up to date. This will ensure any damage to your credit report is temporary.
Can I get a consolidation loan with poor credit?
A poor credit score could prevent you from getting approval. If you have multiple loans and are behind in your repayments, you will likely have a bad credit score. The lender will check your score to determine your creditworthiness. If they do find you are not a risk, they may extend a debt consolidation loan to you.
However, you will likely have a higher interest rate than a regular loan. It's best to know your score before you apply. A low credit score could mean a high interest rate.
⇢ You can get a free credit report here!
▶︎ Moku tip: Be careful of applying to too many credit lenders for a loan as this can negatively affect your credit score.
How you can improve your chances of being approved:
- One way to improve the chances of you being offered a consolidation loan is to opt for a secured loan instead of an unsecured loan. This means using your assets as collateral. Depending on the value of your assets the lender may also offer you a better interest rate.
- If you are unable to get an offer of a loan, create a plan to improve your credit score in the short term. Try to pay down what you currently owe to improve your score and negotiate better terms with the lender.
Another route for getting out of overwhelming debt is debt review. If you are struggling to make ends meet and you're relying on credit to buy essential items like electricity and groceries, there's a good chance that you could be over-indebted.
What is the difference between debt consolidation and debt review?
Debt review, also known as debt counselling, is another debt relief measure. With debt review, while a debt counsellor does consolidate your debt, you do not have to take out another loan to pay off your debt.
How does debt review work?
A debt counsellor will determine—based on your expenses and income—whether or not you are over-indebted. If you have excessive debt, it will be consolidated into a single loan.
Additionally, a payment plan will be established based on your affordability. This means you will only have to make one monthly payment. You only need to make one payment each month.
Your debt counsellor will contact your creditors on your behalf to negotiate a better repayment plan that will settle your debt. The benefit? Your monthly repayments are reduced, and they often reduce the interest rates on your debt, saving you money because you pay less for your outstanding debt.
This is usually the best option for those of you that are falling behind with debt repayments and are deemed to be over-indebted and cannot afford your current living expenses.
The debt review process is regulated by the NCR (National Credit Regulator) and is a legally binding agreement by the National Credit Act. This means that once you are under Debt Review and a court order is granted, your creditors are no longer entitled to hassle you to make your repayments and cannot take any legal action against you or your assets.
Pros and Cons of Debt Review vs a Debt Consolidation Loan
See below for a quick summary of what each process entails:
Meerkat is registered with the NCR (National Credit Regulator – NCRDC2613). We understand that life happens, and you can start to fall behind on your debt repayments. We can help you regain financial control and walk the journey with you to becoming debt-free. As a team, we’re looking out for you.
We also offer competitive credit life cover to protect you and your family if you die, are retrenched, become disabled or suffer a severe illness.
Do you know how much you are paying on your current loans for cover? We may be able to replace your existing cover where it makes sense to do so.
We will also kickstart an emergency savings fund as part of your debt management plan. This ensures you have funds available for when life happens. Don't delay, get started today!
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