Debt consolidation is magical.
Except, it isn’t magical at all. It’s just a basic financial process.
Nevertheless, whether debt consolidation is magical or not, it can either A) make debt repayment much easier or B) save money by reducing interest rates.
Here’s what you need to know.
Generally, debt consolidation makes it much easier to repay debt and simplifies the process. How? By making the monthly instalment more affordable, potentially reducing interest rates or the number of monthly payments.
⭐ Bonus: Looking for alternatives? Here are a few creative ways to reduce your debt.
What is debt consolidation?
Definition of debt consolidation
Debt consolidation is a financial strategy that simplifies debt repayment by merging multiple debts into a single, larger loan, line of credit, or repayment plan.
In some cases, consolidating debt may even reduce interest rates or reduce the overall amount. But, this varies and is influenced by the debt consolidation method and the account holder’s financial health.
Here is a list of the different types of debt that can be consolidated:
- Credit card debt
- Personal loans
- Store accounts
- Medical bills
- Payday loans
- Tax debt
- Overdraft balances
- Student loans
- Auto loans
- Home equity loans
Not bad right? See any types of debt that you’d like to consolidate?
If you do, read through our quick explanation of the process below. After that, we’ll share how to do it.
How debt consolidation works
Debt consolidation combines multiple debts, such as credit card balances, personal loans, retail accounts, auto loans and other types of debt, into a single loan, line of credit, or repayment plan with one monthly payment.
Basically, debt consolidation takes multiple debts and combines them all under a single amount or account.
There are a couple of ways to consolidate debt:
- Debt consolidation loans
- Balance transfer credit card
- Home equity loan
- Debt review
Hang tight. We’ll cover each of these in detail later on.
The aim of debt consolidation is to make the repayment process more straightforward and (if you’re lucky) reduce the overall interest rate on the debts.
The interest rate and terms of the debt consolidation vary between methods and are influenced by the account holder’s creditworthiness and other factors, such as the value of the assets or collateral.
Now, here’s how you can go about consolidating your debt.
Ways to consolidate debt
South Africans have several debt consolidation options available to them.
Here are five common ways to consolidate debt:
- Debt consolidation loan
- Balance transfer credit card
- Home equity loan
- Debt management plan
- A personal line of credit
Unfamiliar with some (or all) of the options on the list? We’ve got you covered. Here’s a brief explanation of each one.
Debt consolidation loans:
A debt consolidation loan is a personal loan used to pay off multiple debts. The new loan is used to pay off other debts so that the lender only has the debt consolidation loan to repay (effectively consolidating the debt under one repayment).
Balance transfer credit card:
Check this out. A balance transfer credit card lets you transfer your outstanding balance from other credit cards onto a new card, typically with a lower interest rate.
Some balance transfer credit cards offer promotional rates (as low as 0%) for a limited time.
This is a handy debt consolidation tool for anyone that’s on top of things. The transfer comes with fees (usually 3 – 5%), and sometimes the promotional rate is followed by an interest rate that is higher than the rate on the previous card.
So, do your research, do the maths, and make sure that the outcome is in your favour.
Home equity loan:
Equity is the difference between the home’s current market value and the amount that is still owed on the mortgage.
What a home equity loan allows you to do is borrow a lump sum against the equity in your home, and because the loan is secured (with the house as an asset), home equity loans typically offer lower interest rates.
Once again, the lump sum can be used to pay off multiple debts with higher interest rates. Effectively consolidating the outstanding debt.
Warning: defaulting (not paying) your home equity loan could cost you your house.
Debt counselling, debt review or a debt management plan:
This could be the safest way to consolidate debt. It’s definitely the best option for anyone struggling to keep up their debt.
Consolidating debt through debt counselling (debt review) can significantly reduce the combined monthly instalment (in some cases reducing the amount by 60% or more), and these programs offer additional legal protection.
This time, the debt is consolidated by a professional rather than relying on a new loan or a new form of credit
Here’s how it works:
A pro, like a debt counsellor, creates a repayment plan by negotiating with creditors. Then, the indebted individual makes one payment each month that gets distributed to their various creditors on their behalf.
A registered business known as a Payment Distribution Agency (or PDA) ensures everyone gets paid.
Simply put, the debt counselling (debt review) process creates a debt repayment plan that consolidates the multiple debts.
Note: if you’re not already familiar with debt counselling (debt review), then check out these posts:
Struggling to keep up with your debt?
Our team can help make your debt affordable once again.
We help thousands of South Africans to reduce their monthly debt repayments, protect them from legal action, and keep their assets — our team can help you too.
A personal line of credit:
An unsecured line of credit can be used to pay off debts, usually with a higher interest rate than a debt consolidation loan.
💡 Tip: this method works best for people with good credit scores.
Each method has its own advantages and disadvantages. Pick the one that suits your financial position.
So, what do the people of South Africa think about this concept? Let’s see.
Why debt consolidation is a popular option for South Africans
The vote is in. Debt consolidation is trending. Debt consolidation is a popular option among South Africans because it makes debt repayment A LOT easier.
One lower monthly repayment vs. seven scattered higher monthly debt repayments, which would you prefer? Exactly.
Let’s weigh the pros and cons to help you decide whether debt consolidation is right for you.
Pros and cons of debt consolidation
Debt consolidation can have its benefits and drawbacks.
Here are some of the pros to consider:
- Simplifies debt management — one monthly instalment is much easier to pay and track.
- Potentially lowers interest rates — options that offer lower interest rates can save money in the long run.
- May improve credit score — better debt management and consistent on-time payments could build a stronger credit score.
⭐ Bonus: Check out our strategy and checklist for building a strong credit score.
While consolidating your debts may offer several benefits, there are some cons to keep in mind as well.
The disadvantages include:
- Longer repayment period — you may end up with a longer repayment period.
- Collateral requirements — some methods require collateral (like home equity loans)
- No long-term solution — debt consolidation doesn’t automatically fix debt problems
Is debt consolidation right for you?
Ask yourself these questions:
- Are your debts high-interest and difficult to manage?
- Do you struggle to make debt payments?
- Would debt consolidation lead to lower interest rates and/or monthly payments?
- Can you make consistent payments on a consolidated loan or line of credit?
If you answered yes to most of these questions, then debt consolidation might be right for you.
Want to consolidate your debt with debt counselling (debt review)? We can help.