Debt consolidation loans

Steps to using a debt consolidation plan

Once you have decided to use a debt consolidation plan, you will need to do the following:

• Calculate how much you need to borrow to cover your debts. This should include any fees or charges you will have to cover in order to pay off your existing debts early.
• Research and compare personal loan products to find one that meets your needs.
• Apply for the personal loan.
• Use the funds to pay off your other debts, along with any fees or charges.
• Continue to make repayments on your personal loan until it has been repaid.

What to consider when consolidating debt with a personal loan

• Affordability. You should confirm that the personal loan you use will be cheaper to pay off than your existing debts. You must also ensure that you will be able to cover the repayments on your new loan to avoid going into further debt. For example, debt consolidation plans tend to include processing fees, early termination fees and late fees that could add up quickly.
• Loan term. Different debt consolidation plans come with different terms, so you should pick a plan that fits best to your schedule.
• Early repayment costs. Many loans will require you to pay additional fees or charges if you repay the loan early. These will need to be paid if you wish to consolidate your debts under a new loan and should be included in your calculations to ensure debt consolidation is the right choice for you.
• Legitimacy. If you decide to use the services of a credit provider or a debt consolidation organisation, it’s your responsibility to check for its Ministry of Law licensing. This is because there are brokers and credit providers who operate illegally in South Africa.
• Reason for debt consolidation. Some debts cannot, and should not, be consolidated. This includes debt related to education loans, car loans, home loans, medical loans or renovation loans. In general, debt consolidation is only allowed for unsecured loans.

Pros and cons of debt consolidation

Tips for debt consolidation

While taking out a debt consolidation loan can help reduce the interest you pay and better manage your repayments, it’s up to you to make the most of your debt consolidation efforts. The following are some useful tips you can take on to help your debt consolidation plan work best for you:

• Work out a debt management plan. If you’re in a position where you need to enter a debt agreement with your creditors, it’s important to agree to a plan that is manageable for you. These agreements are informal and can be worked out between you and your credit provider. If you choose to take out a debt consolidation plan, be sure of the debt management plan you’re getting into.
• Use a budget. Budgeting your debt consolidation repayments ensures that they will remain manageable over the term of the loan. How much will you need to pay each month to ensure your debt is paid off? Work your loan repayments into your budget before you take out the loan.
• Compare your options. Make sure you take a look at all the options available to you before you apply for a debt consolidation plan. Are you applying for the most competitive option available? Ensure that you compare fees, rates and any additional features to see if you’re getting the best option available to you.
• Make extra repayments. If your loan allows for it, making additional repayments can help see your loan paid off sooner and save interest. Make sure you won’t be charged fees for additional repayments, lump-sum payments or early repayment penalties depending on how you plan to repay your loan. If you find you’re saving considerably on interest from consolidating your debt, make sure to put those savings back into your loan.
• Look for ways to cut down on your expenditure. Are there any ways you can cut down on your outgoings? By cutting down your expenditure you can have more money to make additional repayments, the benefits of which are explained above. Ensure you’re in a safe position to manage your repayments and pay back your debts.
• Meet your monthly payments. Debt consolidation will affect your credit score as it is considered a form of unsecured credit. By repaying your payments on time, debt consolidation plans could improve your credit score, exposing you to more favourable loan options in the future.

Frequently asked questions about debt consolidation

• Is debt consolidation right for me?

  As outlined on the page above, there are a few different situations that might make debt consolidation the right option for you. Before you take out a debt consolidation loan, work out what your current monthly repayments are as well as the interest rates you’re paying. Then you can consider the options you have available for your debt consolidation and see if you’ll actually save when you consolidate.

• My current bank offers a debt consolidation plan. Should I just apply with them?

  There are some definite advantages to applying with your current bank — they may be more willing to approve you because they have a past relationship with you and they can see all your incomings and outgoings. Then again, they may not be able to offer you the best deal. You may want to compare your options before you apply to see how competitive their products are. Then, speak to your bank before applying to discuss your eligibility.

• What's the difference between debt consolidation and a debt agreement?

  A debt consolidation plan is just a standard personal loan product that allows you to consolidate your current debts into one. A debt agreement is something usually taken out by people with large debts and even bad credit history and is a form of bankruptcy. Make sure you find out the terms of the loan you’re entering into and the effect it’ll have on your credit file.

• I have some equity in my home. Should I refinance and consolidate my debts that way?

  If you have equity, then this is another option you have available to you. However, there are some things to consider. First off, while rates on home loans are generally much lower than on personal loans, remember these are spread across a much longer term — thirty years as compared to a five or seven-year term. You also need to consider the costs of refinancing before you take on this kind of loan. This option might be good to consider if you have a large amount of debt to consolidate or if you find that this is the most competitive consolidation option that will help manage your debt best.

• Do I need to spend or save differently when I use a debt consolidation plan?

  This depends on the lender you apply with. With a regular debt consolidation plan, you will not be required to change your budget, so long as you manage your repayments. With other types of debt consolidation plans, your budget may be restricted as you are technically entering into a form of bankruptcy. Keep in mind that even if you aren’t restricted, it’s always a good idea to see if there’s any way to cut back on expenses to pay off your debt faster. This can help you save on the interest.