Ways to consolidate debt

According to reports, South Africans are becoming heavily indebted, with interest rate hikes and the weak economy exacerbating the situation. Justmoney chats to DebtBusters about debt consolidations and the types of consolidation loans on offer.

“Debt consolidation is an effective method of debt re-financing, which involves taking out one loan to settle many others. It is a viable financial solution designed to simplify multiple debt repayments and, under some circumstances, save you money. The process involves taking out a single, new loan, at the lowest possible interest rate, to pay off multiple smaller debts,” said Arthur Wasara, marketing assistant at DebtBusters.

The aim of debt consolidation

By combining all your small debts and taking out one loan to settle of all your smaller accounts, you hope to achieve:

• A reduced instalment that is paid to one creditor, thereby freeing up some funds for other living expenses.
• Savings on service fees, administration charges, debit order charges and insurance costs. Debt consolidation reduces your service fees because you will only have one account to pay.
• Your property will not be at risk if the consolidation is done as an unsecured loan for example, your house will not be attached in the event that you fail to pay the loan.
• A simplified repayment of debt as it is easier to pay one creditor each month opposed to multiple accounts.

When should you consider debt consolidation?

Are you in need in of debt consolidation? Wasara explains that following indicates whether or not you are an ideal candidate for this service: 

• You’re unable to keep track of your monthly expenditure.
• You are taking out loans to settle existing debt.
• Most of your income is being used to service debt.

Debt consolidation loans on offering:

If the aforementioned points above apply to you, the following loans could assist you in your time of need:

• Home loans: Generally, financial experts will advise you to use your home loan to consolidate your debt (should you have one) due to the low interest attributed to it. Depending on your credit profile, your home loan rate is probably close to the current prime rate. This is typically much lower than the interest you would be charged for short term loans or retail store cards. Short term loans can earn interest from 21% up to 32% – which is why a debt consolidation loan on much lower interest rate can work well for you.
• Personal loans:  Your interest rate will be dependent on you credit score. Most banks will offer this option if asked about a debt consolidation loan for non-homeowners. Due to the National Credit Regulator (NCR) cracking down on reckless lending by credit providers, most will not list consolidation as a service or product on offer. With proper planning and expert advice, a personal loan is a good way to proceed with a debt consolidation strategy.
• Secured loans: This tends to be an excellent way to lower interest loans for bad credit. Essentially, you’re securing your loan by attaching an asset to it, greatly reducing the risks to the lender and thereby reducing your interest rate. You can attach big ticket items such as your car, but be certain that you will be able to pay that loan back or those assets could be repossessed

Things to consider when consolidating debt:

• Although the monthly payment and interest might be lower, more interest will be paid in the long run if the time taken to pay back the loan is longer.
• Don’t be tempted to take out additional funds on the consolidation loan because your instalments are lower- this can worsen your financial situation.
• Debt consolidation involves replacing one type of debt with another. It is not a means to get out of debt or becoming debt free, but merely a solution to better manage your debt repayments.
• Your property will be at risk if the consolidation is done as a secured loan. If you fail to pay, you may lose your house or car. It is not advisable to use a secured loan to settle unsecured debt.