End the endless cycle of paying every Tom, Dick and Harry.

    Here are the pros and cons of debt consolidation loans if you feel like mounting debt is strangling you.

    Sometimes people consolidate their debt into one affordable monthly repayment.

    • This can be a lifeline for people in danger of losing their homes
    • Debt consolidation offers cheaper interest rates on long-term loans
    • The loans offer you the chance to regain financial control of your life
    • Don’t allow these loans to become a “quick fix” solution
    • Ensure the loan interest rate does not exceed those of existing debt

     

    The two schools of thought to Debt Consolidation Loans are:

    People for the loan believe the loans help simplify the paying out of many different monthly amounts to various parties.

    Those against, feel that the loans “con” people into a false sense of security. The debt has just been shuffled around and not resolved the underlying problem.

    Pros and Cons of debt Consolidation loans

    Pros and cons of debt consolidation loansThis form of finance allows consumers to combine their debt by using one loan to repay a number of smaller debts. All the various creditors have different credit agreements, terms, monthly fees and interest rates. So debtors have only one loan with one creditor and are liable for only one monthly repayment fee.

    These loans provide a lifeline for people in danger of losing their homes or motor vehicles because of default repayments. However, as with any credit facility, terms and conditions of this type of loan must be carefully read before making a final decision.

    Generally, the loans offer cheaper interest rates on long-term loans. They reduce monthly debt repayments, easing financial stress and giving the client more monthly cash-in-hand.

    Let’s look At the Pros:

    • You combine your debt into one affordable monthly repayment
    • The loans are also available to people with bad credit records
    • Lenders believe that consolidation loans help people gain financial stability and make it easier on households to manage their finances
    • Borrowers can consolidate up to five outstanding accounts without having to provide any settlement quotes
    • Repayments are usually between 18 months to 6 years.

    How to Apply for a Debt consolidation Loan

    Applying for a Debt Consolidation Loan couldn’t be easier. All you have to do is to provide:

    • Copies of your ID document
    • Latest original pay slip
    • Bank statements in which three salary cheque deposits are reflected
    • Proof of residence

    Example of a Consolidation loan Repayment

    • Amount borrowed: R20 000
    • Period of loan: 12 months
    • Monthly instalment: R2 049.05
    • Total amount payable: R24 588.60

    Let’s look At the Cons:

    • All you are achieving is moving the debt around. The underlying problem, namely debt, remains unresolved
    • People applying for loans are already financially stressed or are rapidly heading that way
    • The loan is no more than a “quick fix”.

    Who offers Debt Consolidation Loans?

    There are a number of providers in South Africa. However, none of the country’s big four banks offer this type of loan. Instead, borrowers can apply for a secured loan (an advance on a home loan) or an unsecured loan, such as personal financing.

    You must have a clean credit record to obtain financing via these banks. Applicants who fail to meet existing debt, or who have a record of defaults and judgements, are more than likely to be turned down.

    A debt Consolidation check-list

    Before taking out this type of loan, ensure that:

    • The loan will cover all outstanding debts
    • Overall interest rates on the outstanding debts will be reduced
    • Monthly repayments will be smaller
    • The loan repayment will be a reasonable amount as a percentage of monthly income
    • If credit life insurance forms part of the loan package, ensure that it covers death, disability or retrenchment
    • The loan makes provision for financial needs over the next three to five years

    Choose debt Repayments carefully

    You should carefully examine each debt and the interest rates linked to each one. For example, it would be unwise to move a credit card debt into a consolidation loan if you are paying 14% interest on the credit card, but 31% of the loan.

    Conclusion

    It is unlikely that this type of loan will be approved for people with bad credit ratings, default payments and judgements against them. However, there are thousands of people who have found themselves in debt because of reckless spending or unforeseen events, such as retrenchment.

    These loans should be used to save on interest repayments, and not simply to reduce long-term debt. It is up to everyone to change their spending habits and learn to live on less. Although the underlying problem for many people is debt, there are many other ways to deal with the situation.

    Avoid falling into the same spending patterns that resulted in debt in the first place as debt can destroy families. The pros and cons of debt consolidation loans must be taken into account.

    Apply for a loan by filling out the form on this page. Then submit it!