Debt Consolidation – What You Should Know

Debt is such a slippery slope and it’s so easy for things to get quickly out of control. Whether it’s a short-term loan for items like cars, or a longer repayment plan for a home, the road out of debt is long and tough. Debt consolidation is a possible solution for many South Africans to help them get back on their feet financially.

What is debt consolidation?

If you have several short-term accounts – a clothing account or a loan for your car, for instance – you’ll be paying off a monthly instalment for each, each of which will carry their own interest rate. Short-term loans typically attract higher interest rates – so the total interest repayments are likely to be adding significantly to the overall debt. This can lead to difficulty in trying to service all these debts each month.

Debt consolidation means taking out another loan – usually at a lower interest rate – to pay off your short-term debts, reducing the total interest payable on the debt, and easing your monthly cash flow.

What’s the catch?

It’s a common misconception that debt consolidation reduces your debt. Consolidating your debt simply means you’re combining all your debt into one loan, allowing you to extend your repayment time. If the interest rate you pay on the new loan is lower than the rates you were paying on your other debts, then your total repayments should be lower – but the original debt still needs to be paid off.

Furthermore, you should try as far as possible to continue paying off the consolidated debts within the original repayment period, or as soon as you can. This requires discipline and commitment.

Otherwise, paying off the loans over a longer term will result in higher total interest repayments over time.

It’s also important to note that debt consolidation is not the ideal solution for everyone. For instance, if you have a bad credit score, lenders are either going to increase your interest rate, or simply not grant you the loan at all.

Are there other options?

If the idea of replacing your current short-term debt with one consolidated loan simply isn’t an option for you, it’s important to know this is not the only solution.

• Debt review – Also known as debt counselling, this is where your existing finances, income, expenses and money owed are evaluated by a third party. From there, your account manager approaches your creditors and negotiates a repayment amount that works for both them and you. Whether it’s reducing your interest rate, or extending your repayment period (or both), an agreement is reached that’s manageable for you. Note that while you are under debt review, you will not qualify for additional loans.
• Refinancing – This option is only applicable to existing home owners who have built up equity on their property. Equity is the difference between the current value of your property and what you still owe on it. The more money you pay into your home loan, the more equity you’ll have at your disposal to apply for a refinance loan (or second mortgage). As home loans typically attract lower interest rates, this option is likely to give you the lowest monthly repayments should you decide to use the additional cash accessed from your bond to pay off your short-term debt.

Take Note

Consolidating your debt can be an astute financial management tool, and for some, it can provide a workable solution to mounting debt. However, it’s important to choose carefully when looking at solutions, because desperation can potentially leave you in a worse off situation. So, take these points into consideration first

• If you decide to opt for debt review, don’t just choose the first agency you come across, shop around and compare their services, interest rates and success rates.
• Debt review is a non-loan scenario and a legally accredited process that can temporarily hold off creditors coming to claim what is owed from you.
• Check your credit score first so that you know whether you’re a high-risk applicant or not.
   

SA Home Loans is an accredited financial institution that can guide you in the right direction. Should you wish to refinance your home to consolidate your short-term debt, speak to one of our consultants about your options.

Contact SA Home Loans today on 0860 2 4 6 8 10 for more information.