Merge your high-interest debts into one loan repayment
Debt consolidation is simply the merger of multiple debts into one single account that carries its own interest rate and loan term.
It is, therefore, a personal loan and can be obtained from a bank or a private lender but, is rarely advertised specifically as a debt consolidation loan. This is because major banks and lenders are aware of the dangers and difficulties arising from consolidation and prefer not to encourage or market consolidation as a solution to debt particularly because they know it is not a solution to bad spending habits which is generally the root cause of bad and overwhelming debt.
Before we begin taking a closer look at debt consolidation and its benefits and risks we must first delve into debt in general and the spending habits that cause someone to get into a difficult debt situation.
When it comes to debt, things can quickly and unexpectedly get out of control. One minute you have only your home and car finance to repay and the next you have 3 store cards, 2 credit cards and a personal loan to think about as well.
Although undesirable and difficult to talk about, there are millions of South Africans who are in this very situation and are struggling to keep up. To keep debt to a minimum it's important to develop and stick to a monthly budget that encourages you not to spend more than you can afford to.
If you are struggling to pay debts or bills you should never borrow money to make these payments as this will naturally only worsen your situation.
What kind of debt can be Consolidated?
Typically, it is short-term, high-interest debts that can be consolidated. This includes any credit card debt, store cards and personal loans since they typically carry the highest interest rates and are typically the reason that people struggle to manage their debts.
The objective of a consolidation loan is to reduce the interest on debts, to make managing debt easier and to reduce the amount of income that one pays toward debt every month, thereby freeing up income. This is done by taking out one loan to pay off all of your smaller debts. You now have one amount to pay at a lower interest rate.
To achieve the primary goal of reducing the interest paid toward debt only unsecured, high-interest debts should be considered. One of the biggest mistakes that people make when opting for debt consolidation is assuming that lower monthly debt instalments mean they are saving money.
On the contrary, paying smaller amounts towards your debt over a longer period of time means that you will end up paying more interest overall. It is therefore in your best interest to consider a debt consolidation loan that can be repaid as quickly as possible and not drawn out longer than is necessary.
Consolidating debt using home equity
One of the largest, most important and beneficial forms of debt is a home loan. Home loans usually carry a very low-interest rate but, since their low-interest rates are applied over a very long term, you will end up paying a significant amount in interest and fees.
This is significant when considering debt consolidation because so many people consolidate debt by taking out a second mortgage. Home equity is the percentage of your home loan that you have repaid minus the percentage that is still outstanding and is used to determine whether or not a lender can offer you a second mortgage. When this has been decided, the borrower applies for an additional sum of money which is then added to their existing home loan.
This amount can then be used to repay existing unsecured debts - leaving the borrower with a single large debt. If you choose to use home equity to secure a debt consolidation loan it is imperative that you do not take on any additional debt to ensure maximum success. Using home equity to consolidate debt is ideal for those who do not qualify for an unsecured loan and have large debts they want to include in the consolidation - such as a car loan.
Consolidating debt using an unsecured Personal loan
In order to qualify for a personal loan and therefore, a debt consolidation loan you must have a good credit score and not be undergoing debt review or counselling. In addition, most lenders will check to ensure that you have not missed more than 2 debt repayments to ensure that you are adequately equipped and prepared to take on the new loan.
If you use home equity or a secured loan to consolidate debt you will likely receive a lower interest rate, however, using an unsecured loan will likely be more expensive. This is simply because unsecured credit is riskier for a lender and will naturally come at a higher interest rate.
The upside to an unsecured loan is that you are not putting your home or a major asset on the line to get rid of smaller debts. Using this option to consolidate debt is ideal for people who have not missed any debt repayments, have a good credit history and have 3 or more high-interest debts they want to consolidate.
What you need to qualify for a Consolidation loan
Although debt consolidation is commonly associated with bad credit and nonpayment, it is actually only those with a good credit history or some form of security that can apply for and be granted one from a bank.
If you don't qualify for a personal loan with your bank you will likely not qualify for a consolidation loan and may have to consider an alternative lender or alternative to debt consolidation which includes debt review and debt counselling.
To qualify you must not have attained the age of 60 prior to the end of the consolidation loan term, have more than 3 unsecured debts that you wish to consolidate, have been employed for 3 to 12 months depending on how much you want to borrow and have a South African identity document.
You will be offered an interest rate that is directly linked to your personal credit history, loan term and loan amount and, of course, whether the loan is secured or unsecured.
How to get started with Debt consolidation and alternatives
Prior to applying for a debt consolidation loan, it is critical that you conduct as much research as possible so that you can accurately decide if it's the right thing to do. While you're at it you could also consider adjusting your budget and even look into alternatives to consolidation such as debt counselling.
If you think consolidation is right for you, then you can move on to the next step and calculate the total value of any outstanding debt that you may have as well as the interest rate you are paying on each.
You will then be better equipped to decide if consolidating your debts will save you money or will cost you more in the long run. You can start looking for a lender by consulting the websites of the debt consolidation lenders that we have listed below.
If you do not meet the minimum requirements to apply for a particular product do not make the loan application online as this will lead to an unnecessary credit check. If you have any questions as to your credit standing you can obtain a copy of your credit report for free, once every 12 months.