Taking out loans is often unavoidable especially in these present times when the cost of living often gets ahead of many of us. People apply for loans for different reasons: to pay for their education, to buy a house, for a new car, to start a business, for the improvement of their health, etc. In this way, loans are important and necessary to have a comfortable life.

However, more often than not, people find that they have bitten off more than they can chew and struggle with repaying their debts. Too much debt can put anyone in big trouble. It is a good thing then that banks and credit companies offer debt consolidation loans.

Debt consolidation loans are the most sought after solution for mounting debts caused by multiple debts from multiple lenders. Having multiple debts can increase one’s risk of defaulting and getting a bad credit history.

What are Debt Consolidation Loans?

Debt consolidation means taking out a loan to pay off many others and this is often done to secure a fixed interest rate, a lower interest rate or to simply secure only one loan to pay off monthly.

Debt consolidation often involves a secured loan against an asset that serves as collateral i.e. a house. The risk to the lender is lowered therefore they can offer a reduced interest rate.

Types of Debt Consolidation Loans

Consolidating your debts means replacing your smaller loans with a larger but more manageable loan that reduces your risk of defaulting and getting a bad credit rating.

There are two types of debt consolidation loans: secured and unsecured.

Secured Debt Consolidation Loan

A secured debt consolidation loan involves putting forth a property as security against the loan and in case you are not able to pay back the loan, you run the risk of losing that property.

The interest on this kind of debt consolidation loan is a lot lower since the bank or credit company has security in the form of the property you put forth. Additionally, with a secured debt consolidation loan, you can qualify for a higher amount than with an unsecured loan.

A lot of people choose to consolidate their debts into their home loans as this can help them have better cash flow at the end of the month because of the lower repayment required. However, if you choose to consolidate your debts into your home loan, it is always best to repay over the short term rather than capitalizing it over a 20 year term.

Unsecured Debt Consolidation Loan

This type of debt consolidation loan does not require collateral so your property is protected against repossession in case you are not able to repay the loan. But then, due to the higher risks associated to it, credit companies and banks will require that you compensate them with a relatively higher interest rate. You may not qualify for a large sum of money with this type of debt consolidation loan as well.

Generally, more people opt for secured consolidation loans due to the larger amount of money they can borrow. It is simply a matter of strictly adhering to the repayment plan.

The Advantages of Debt Consolidation Loans

Currently in South Africa, the average percentage of debt to income is 73% and there are about 80,000 judgments for debt per month. Often, it is not enough to just meet the minimum payment on all your personal loans, credit cards, and mortgage per month. The compounding of interest will soon catch up on you and you will find yourself in a great financial trouble which will be difficult to get out of.

Your best option for paying off multiple loans especially if you find all the repayment schedules overwhelming is debt consolidation.

The following are the advantages of debt consolidation loans:

• Interest rate reduction – this is one of the major benefits of loan consolidation. When you consolidate your loans, your interest rate is lowered significantly which is a real blessing.
• Lower monthly payments – a lower rate is accompanied by a lower monthly payment on your debt.
• Single payment – who doesn’t prefer to make one single payment to just one creditor over making multiple payments a month? Paying off just one debt will prevent the damaging effects of dealing with difficult to manage multiple debts. This is an easier way to keep track of your money.
• Eliminate monthly administration charges – debt consolidation loans help you save not only on the overall interest rate but also on all your monthly charges for all your separate accounts. This is because all the monthly administration charges for your bond that includes overdraft fees, car repayments, etc. are eliminated.
• Debt consolidation can be considered a tax-free investment – for example, the return on this investment can be more than 20 percent on credit card debt, and it’s tax-free.
• Consolidating loans can help your credit record – accumulating debts can damage your credit rating as there is a higher risk of you missing payments or having too much credit card debt. Consolidating and paying off your outstanding debts can prevent this damage on your credit.

Debt consolidation loans are all about securing a financial stability for you as well as your family. This enables you to look forward to a brighter financial future which is something that many people actually desire, which isn’t a bad thing at all.

Debt consolidation has its own pitfall though. After consolidating their debts, a lot of people start to think that their problems are over and with more cash left over than previously, they tend to apply for more credit cards thinking that they can afford these. As much as possible, avoid falling into this trap.  Use a large chunk of the extra cash to pay off your bond. Remember, this is the best tax-free investment you could make.

SA Banks that Offer Debt Consolidation Loans

 

• ABSA - The Absa Home Loan lets you finance residential property including vacant land. The generic Home Loan product they offer can be tailor-made to fit customer requirements by adding various options and features.
• Nedbank – provides a variety of flexible home loan solutions and debt consolidation loans which are designed to enable consumers to afford the home they’ve always wanted as well as ease their financial burden.
• First National Bank (FNB) – FNB employs expert financial advisors that can help borrowers make the right choices when consolidating their debts.

These banks have different qualifying criteria however they usually require that you are a South African citizen and you should be employed for no less than 2 years.

If you have taken out more loans that you can handle and if you find yourself in the brink of financial ruin, it is high time you give debt consolidation loans serious thought. Even if you think you can still handle the repayment of your multiple loans, you should still consider debt consolidation – it is good for your credit and can help you start setting aside some money for your future.