Is there a way to consolidate all my loans and pay one amount?

A South African consumer approached DebtBusters with the following question:

“I would like to obtain a debt consolidation loan. I have had two bad years where I have made several bad financial decisions. I have three loans, from different credit providers, and my credit card account is in arrears.

What I would like to do is combine all my debt into one amount and only pay that one amount off on a monthly basis. However, if this is not a possibility, what other alternative solutions do you propose?”

DebtBusters advises the following: 

Getting stuck in a debt cycle 

Being trapped in a “debt cycle” occurs when you borrow money you can no longer afford to pay back and you take out additional, larger loans to pay off the debt that has accrued.

Eventually, these debt repayments as your debt will become unaffordable. 

However, you are not alone – many South African consumers are in the same position as you right now.

If you need to take on more debt to pay off your existing debt, you’re probably overindebted and should apply for a programme that will help you become debt-free. 

Can you consolidate loans into one payment?

Yes, you can consolidate your loans into a single payment.

There are two ways you can consolidate your loans:

One is by borrowing a large amount of money to pay off your small debts and pay a single instalment to one lender. However, due to the spiralling debt crisis in South Africa, the banks have cut back on unsecured lending, making it more difficult to get a debt consolidation loan.

The other way you can consolidate your debt is through debt counselling, which is the best method to become debt-free.

With debt counselling, you don’t have to take on another loan. If you are struggling to manage your debt or are overindebted, your debt counsellor will bundle your debts, including credit-card debt, into one manageable monthly instalment, which will be divided among your creditors.

Your debt counsellor will negotiate lower interest rates and instalments with your creditors. You will pay one monthly instalment which will be divided among and distributed to all your creditors.  

By consolidating your debts, you will not only simplify your finances and reduce the stress and burden of managing multiple loans but will also potentially save money on interest payments.

What are the eligibility criteria for a consolidation loan?

The criteria depend on the credit provider. However, you typically need a stable income, a decent credit score, and an acceptable debt-to-income ratio. 

Stable income: A stable income will show that you can afford to repay the loan you are applying for.

Credit score: Make sure you pay all your accounts on time to improve your credit score. A good credit score helps you obtain a better interest rate and demonstrates that you are a good debtor worthy of obtaining a loan. 

Debt-to-income ratio: If you don’t have enough disposable income, your consolidation loan application may be rejected. Make sure your debt-to-income ratio is not more than 40% when you are applying for a loan. If it is, you should consider applying for debt counselling.

When will the bank offer a consolidation loan?

South African banks are only likely to grant you a debt consolidation loan if you can afford your debt repayments comfortably.

Their main aim is to reduce the hassle of paying multiple credit providers, not a solution to help reduce debt instalments and settle debt faster. 

Interest rates and fees 

The interest and fees that you pay for your consolidation loan are determined by your bank or credit provider. 

Interest rates vary depending on factors such as your creditworthiness, loan amount, loan term, and lender. If your credit score is low, you are likely to pay higher interest rates, and if your credit score is high, you’re likely to pay lower interest rates.

The longer you take to pay your loan, the higher the interest will be.

In addition to interest rates, consolidation loans can also come with various fees. These fees vary depending on the lender, loan amount, and loan terms. 

Some common fees associated with consolidation loans include:

Initiation fee: This fee is typically charged by the lender to cover administrative costs and the costs associated with processing the loan.

Service fee: This is an amount that you pay monthly to cover the administrative costs of your loan.

Debt consolidation loans and credit cards 

Debt consolidation loans rarely cover credit card accounts. They are normally used to pay off personal loans.

Consolidating your debt with a loan hinders the process of settling your debt. You accumulate more debt, and you stay in the debt cycle. If you want a consolidation plan that covers all your debts, debt counselling is the answer.

Debt consolidation loans were introduced primarily for convenience. They are meant to help consumers manage multiple instalments.

The risks of consolidation loans

Increased debt: By consolidating multiple debts into one loan, you may feel a false sense of relief and start using your credit cards or taking out more loans, leading to further financial strain.

Higher interest rates: Depending on the terms of the consolidation loan, you may end up paying more interest over the long run, ultimately costing you more than if you had paid off your debts individually.

Additional fees: Some lenders may charge you penalties for early repayment, which can add to the overall cost of the loan.

Damaged credit score: If you are unable to make your consolidation loan payments on time, you risk damaging your credit score and the lender may take legal action against you.

An alternative to debt consolidation: debt counselling 

DebtBusters offers an alternative debt solution similar to debt consolidation, called debt counselling. Debt counselling is a legal programme that was introduced by the government in 2007 to help consumers who are struggling with their debt to ease their burden.

Debt counselling is a debt solution whereby a debt counsellor will restructure your debts by negotiating interest rates with your credit providers, without your having to take out another loan. Your monthly debt repayments will be reduced as interest rates will be renegotiated to a lower amount. 

Debt counselling also protects your assets from creditors. Legally, your car and home loan agreements should be in your debt counselling plan because the programme prevents creditors from taking legal action against you or repossessing your assets.

Creditors will only communicate through your debt counsellor. You will have peace of mind and extra cash in your pocket.

Make sure you apply for debt counselling before your creditors take legal action against you.

Put all your debt into one payment 

Debt counselling consolidates all your debt repayments into one amount, without your having to take out a loan, and covers credit card repayments. As with debt consolidation, you only have to make one monthly payment to a Payment Distribution Agency.

The process involves working with a trained debt counsellor who will assess your financial situation, create a budget that is tailored to your needs, negotiate with creditors to reduce interest rates and repayment amounts, and provide guidance on how to manage your debt effectively. The goal of debt counselling is to help you regain control of your finances and ultimately become debt-free. 

To find out more information about debt counselling, contact DebtBusters on 086 999 0606. Alternatively, watch the DebtBusters animation explaining the debt counselling process.