This is one of the most popular searches in Google when it comes to an individual’s financial situation. It is no surprise when over 8 million of credit-active consumers in South Africa are over-indebted. This means that each month they are struggling to keep up with their debt repayments and balances are spiralling out of control.
Should I consolidate?
Often when faced with this, consumers take out a consolidation loan to pay off all the other loans they have. This means you only make one repayment each month, often at a lower amount as the loan is taken out over the longer term. It sounds like you will be in a much better situation. Not always. By extending the repayment term the interest is increased and there are often administration costs to consider.
Debt consolidation loans also require commitment. If you choose this route to pay off debt you need to adjust your lifestyle or living expenses, so you do not re-use other credit facilities that you have now paid off with the loan. This will just compound your existing debt situation and most likely lead to legal action as you start to fall behind again.
Use the avalanche plan
If your debts seem manageable you can follow the avalanche plan. You will continue to pay the minimum amount on all your debts but allocate any additional funds to the one with the highest interest rate first.
Let’s say you owe the following –
- R2500 in a personal loan @ 4.29% interest
- R12000 in credit card debt at 15.59%
- R3000 car loan at 3.5%
You would make the minimum payments on your personal and car loans and put all extra money towards your credit card debt with the highest interest rate. You keep chipping away at it until the debt is repaid in full. Once that is paid you put the extra money to the personal loan which has the next highest interest rate. Then, once you have settled that, you start on the car loan. This helps minimise interest over time meaning you pay off the capital in a quicker time.
Another option is the snowball method where you pay the smallest balance first. This often helps with motivation but may result in paying more interest over time.
Whether you choose the avalanche or snowball method you need to stop using any of your credit facilities to avoid your existing debt situation worsening. It does take commitment and unfortunately there is no quick fix.
Debt counselling is a process of consolidating all your debt without taking out another loan. Your existing debt repayments are reduced to a more affordable amount. A debt counsellor will also negotiate lower interest rates and ensure you and your assets are protected from any legal action. As your monthly repayments are reduced you will have enough disposable income to cover your living expenses. Your cash flow is easier to manage and you’ll no longer need to take out more credit to get through each month. At the end of the process you are issued with a clearance certificate that informs all credit bureaus of your commitment to the process. You are deemed as debt-free and are welcome to use new credit facilities should you wish.
Just use them wisely and make sure you save up an emergency fund to avoid any future debt-traps.
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