Keeping track of 4 [or more] different accounts and loans is a pain.
Plus, everything has a different interest rate, balance, and repayment date. There has to be a simpler way?
There is. It’s called debt consolidation.
Here’s how it works.
How does debt consolidation work
Debt consolidation allows South Africans to combine multiple debts and loans. It helps to make it easier to pay back and track a single payment. Plus, in some cases, it can reduce the interest or monthly cost. Debts are typically consolidated through debt counselling or by taking out a debt consolidation loan.
To consolidate multiple debts, an individual either applies for debt counselling or takes out a debt consolidation loan.
What exactly is debt consolidation? To consolidate means: to combine a number of things together. That means debt consolidation is the practice of merging multiple debts—things like credit card balances, personal loans, or other accounts.
There are two ways to consolidate debt:
- By applying for debt counselling
- Using a debt consolidation loan
Each has its own advantages and disadvantages. Let’s take a closer look.
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.
How to consolidate your debt
There are two ways to consolidate debt. Debt counselling and debt consolidation loans. To consolidate debt through debt counselling, simply find a registered debt counsellor and apply. They’ll take it from there and consolidate the debt under a more manageable repayment plan.
To consolidate debt using a debt consolidation loan, calculate the total outstanding debt and apply for a debt consolidation loan that covers the total amount. The new loan repays all of the existing accounts. Then the lender repays the new consolidation loan.
Consolidating debt with debt counselling
Debt counselling is a legal process in South Africa that helps people who are struggling to keep up with their debt. During debt counselling, a debt counsellor works with the applicant’s creditors to restructure the debts and combine everything under a more affordable repayment plan. With one payment that a registered payment distributor distributes.
This makes payments more affordable. Often several thousand Rand cheaper than the original monthly total. And it could lower the interest rates while offering other great benefits like legal protection.
- Biggest benefit: Protects applicants from legal action by creditors while consolidating the debt with a lower monthly instalment.
- Biggest disadvantage: Applicants can’t take on new credit during the process. (Which is actually a good thing. It makes it easier to repay the existing debt.)
⭐ Related content:
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.
Consolidating debt using a debt consolidation loan
A debt consolidation loan lets lenders combine multiple debts by using a new loan to repay the old accounts. While it can make managing the debt easier, debt consolidation loans might not lower the interest rate or monthly payments. The affordability of the loan will depend on the applicant’s credit score.
- Biggest benefit: Simplifies repayment by combining multiple debts into one monthly payment.
- Biggest disadvantage: Requires careful consideration of the new loan terms to make sure they are better than the terms on the existing debts.
A loan is a loan. Whereas, debt counselling is a tailored approach. It’s designed to work in favour of the applicant.
That’s why we’d recommend debt counselling over a loan. But everyone’s circumstances differ. One may be better suited than the other—consider your own situation before you decide.
Frequently asked questions
Is debt consolidation a good idea?
Debt consolidation can make it easier to manage debt. Making a single payment simplifies the process. Whether it is a good idea depends on whether an individual chooses debt counselling or a debt consolidation loan, and their financial situation. For over-indebted individuals, debt counselling can be a great solution, whereas a debt consolidation loan with bad terms could make things even worse.
Debt consolidation loans: Can be a good idea when the applicant can afford it and when the new loan terms are better than the current loan terms. But be careful, they also come with risks. A new loan could extend the repayment period, which could cost more over time.
Debt counselling: Might be a better alternative, especially for anyone already struggling with repayments. Debt counselling not only consolidates the debt but also offers lower monthly repayments, legal protection, and support. This makes it the safer option between the two.
If you’re considering debt consolidation, think about your situation and talk to a professional if you can.
Does debt consolidation affect your credit score?
Yes, debt consolidation can affect your credit score. But the impact can be both positive and negative. The impact depends on the structure and whether the applicant makes consistent on-time payments.
Debt consolidation can improve someone’s credit score when they pay in full and on time. On the other hand, if the consolidation process extends the repayment period or the individual fails to manage payments responsibly, it could negatively impact their credit score.
In summary
Debt consolidation can be a life-changing tool.
It can simplify debt management and [if done right] even make it more affordable.
Consider the two approaches, debt counselling or debt consolidation loans, weigh the pros and cons and choose the one that works for you.
If you want to talk to someone about managing your debt, we can help. Try our online assessment at My Debt Hero to see if you qualify to reduce your debt.
