Is it time to consolidate your debt?

If you have multiple credit agreements across various credit providers or you can’t keep up with your monthly instalments, consolidating your debt commitments into one could assist you.

JustMoney looks at ways you can consolidate your debt.

Tip: Are you saddled with debt? Click here for the best relief plan.

How to consolidate your debt?

Debt consolidation can happen in many ways. But in this article, we’re going to focus on the two most common ways: debt consolidation with a loan, and debt counselling.

Debt consolidation with a loan is when you replace all your existing debt with a new loan. This includes your personal loans, credit cards, store cards, and vehicle loans.

“You could consolidate your debt in the form of a consolidation loan or a personal loan (unsecured debt). In certain instances, a home loan (secured debt) may also be used to consolidate your debt,” says Amika Maharaj, head of product at FNB Retail Loans.

Using this method, your creditor will pay off all of your existing debt with other creditors. This will leave you with one creditor instead of the multiple you had. The creditor will then extend your repayment plan in order to reduce your instalments.

“Interest rates on secured debt are generally lower than unsecured debt, and this could help you save on interest costs, especially if you pay in as many extra funds as you can to settle the loan early,” says Maharaj.

According to Maharaj, consolidating your debt with a loan will help you in the following ways:

• You’ll gain more control of your debt by managing it in a single place with one credit provider. This means fewer debit orders to maintain, and managing only one commitment.
• Typically, you could be paying a monthly service fee of up to R69 for each of your credit agreements. By consolidating your debt commitments, you could benefit by paying only one service fee.
• Depending on the credit provider with whom you choose to consolidate your debt, you could benefit from a personalised interest rate, which could be a lower interest rate than what you’re currently paying your various credit providers.
• Depending on the conditions of the new agreement, an extended term could offer you a lower instalment than what you’re currently paying across various providers. While this may offer you a cashflow benefit, it’s important to note that any extra funds should be used to pay into the loan to save on interest costs and settle the loan as early as possible.

Who qualifies for a consolidation loan?

According to Maharaj, your eligibility for a consolidation loan depends on your credit profile and your ability to repay the loan. If you haven’t been skipping your payments, and your credit utilisation is not high, you’ll stand a good chance of obtaining more credit.

The creditor will also assess affordability by checking your debt/expense-to-income ratio. If it’s too high, your loan application won’t be approved.

What impact does a consolidation loan have on your credit score?

As with any loan being extended to you, whether it’s a new loan or an increase in existing facilities, the credit provider must report this, as well as the repayments, to the credit bureau.

If you don’t pay your instalments, your credit score will drop. Therefore, it’s important to keep up to date with your credit commitments and to avoid over-extending yourself financially. 

What about debt counselling?

Debt counselling is another debt solution that combines your debt into one. However, you don’t take a loan to do it. A debt counsellor will bundle up all of your debt to ensure that you pay a single instalment that is usually less than the original sum of your instalments.

The debt counsellor will negotiate lower interest rates with your creditors to ensure you get the relief you need. As with consolidation with a loan, the time you take to pay your debt will be extended.

When you’re under debt counselling, creditors will not have direct communication with you. A payment distribution agency (PDA) will collect the funds from you and distribute it to your creditors. Debt counselling also prevents creditors from taking legal action against you. However, you have to apply for debt counselling before a Section 129 notice is issued against you.

Like most services, debt counselling isn’t free. You’ll pay a certain amount that’s in line with the National Credit Regulator (NCR) regulations.

Who qualifies for debt counselling?

Debt counselling is for people who are struggling to pay their monthly instalments. It was instituted by the NCR to provide relief to overindebted consumers. The debt counsellor will assess your financial situation to ascertain that you are indeed overindebted.

When applying for debt counselling you must supply your proof of income and a list of all your debt and expenses. If you don’t have income but are married in community of property, you can jointly apply with your spouse. 

What impact does debt counselling have on your credit score?

Being under debt counselling will not affect your credit score, but you won’t be allowed to take up any more debt.

Your credit score is mostly damaged by non-payment, high credit utilisation, and hard credit enquiries. Your profile will be flagged until you’ve completed your debt counselling programme. After receiving your clearance certificate, you can start building your credit score again.

Consolidating your debt will help you manage it better. Fill in this form and a consultant will get in touch.