Ever feel like there are just too many debt repayments to track?
Multiple accounts, multiple payments, and let’s not even talk about all the interest rates and dates.
Debt consolidation loans offer a way to simplify it all—one loan, one payment, less stress.
But is it the best option? Let’s find out.
What is a consolidation loan?
A consolidation loan is a type of loan that combines multiple debts into one single loan with a fixed repayment schedule. It simplifies debt management by replacing multiple payments with one monthly repayment and often comes with a lower interest rate.
Debt consolidation loans are commonly used to merge credit card debt, personal loans, and store accounts.
Basically, it’s a loan that covers other debts to combine what is owed under a new agreement.
Here’s how it works.
We help thousands of South Africans reduce monthly debt costs, protect their assets, and stay out of court—find out what we can do for you.
How does a consolidation loan work?
A consolidation loan works by using a new loan to pay off multiple existing debts. The borrower then makes one monthly repayment on the new loan instead of managing multiple accounts. This approach reduces financial complexity and may offer terms the borrower prefers, such as a lower interest rate, repayment amount, or a different repayment period.
The key is to choose a consolidation loan with better terms. Otherwise, it can become a problem. Some debt consolidation methods make things better, while others make things worse.
Check out: How does debt consolidation work? (and is it a good idea?)
It all depends on the applicant’s circumstances.
Take a look at the pros and cons.
Advantages and disadvantages of using a debt consolidation loan
Advantages:
- Simplifies payments: Managing one monthly repayment is easier than keeping track of multiple accounts.
- Potentially lowers interest rates: Consolidation loans can come with reduced rates, potentially lowering the cost of borrowing depending on the term.
Disadvantages:
- Could increase the overall cost: Extending the repayment period can result in paying more interest in the long run.
- Secured loans can be risky: Loans secured against assets, like a home, put those assets at risk if repayments are missed.
Now, if you’re familiar with debt management options. You may recognise that there are other ways to get the same benefits.
Debt review can also consolidate debts to simplify payments and reduce interest rates.
So, how do these options differ?
Is debt consolidation the same as debt review?
Debt consolidation and debt review are different financial solutions. Debt consolidation loans involve taking out a new loan to combine and repay existing debts. Debt review is a legal process in South Africa that consolidates debts under a repayment plan to combine debts and make them more affordable without requiring new credit or risking assets as collateral.
Here’s the key takeaway…
Debt consolidation is about combining debts to simplify debt repayment. Debt review and debt consolidation loans both consolidate debt. But in different ways.
- Debt review is less risky and offers benefits like legal protection that can prevent things like asset repossession.
- Debt consolidation loans are riskier and can lead to asset repossession if the loan is secured against a home or a car.
Let’s look at all the ways someone could consolidate their debt.
We help thousands of South Africans reduce monthly debt costs, protect their assets, and stay out of court—find out what we can do for you.
How to consolidate your debt
Debt consolidation can be achieved through several methods, each suited to different circumstances. Choosing the right approach involves assessing your debts, income, and long-term goals.
Not sure where to start? Let’s explore the options.
Ways to consolidate debt
1. Debt consolidation loans
Debt consolidation loans are a common way to combine multiple debts into one manageable repayment. These loans can be classified into secured and unsecured options:
Secured vs unsecured debt consolidation loans
Debt consolidation loans can be either secured or unsecured, depending on the borrower’s needs and financial situation. Secured loans require collateral, such as a home or vehicle, and often come with lower interest rates because they reduce the lender’s risk. Unsecured loans, on the other hand, do not require collateral but typically come with higher interest rates. While secured loans may offer better terms, they carry greater risk for borrowers, as failure to repay could result in the loss of the pledged asset.
How to consolidate your debt using a debt consolidation loan
- Calculate the total amount of debt that needs consolidation and decide whether a secured or unsecured loan is more suitable.
- Research lenders to find those offering low interest rates, manageable repayment terms, and minimal fees.
- Submit an application with the required documents, including proof of income and debt details.
- Use the loan funds to settle current debts and focus on repaying the new loan on time.
2. Debt counselling (debt review)
Debt counselling, also referred to as debt review, is a legal process in South Africa designed to help over-indebted individuals restructure their repayments without taking on new credit. This option provides legal protection from creditors and a manageable repayment plan.
How to consolidate your debt using debt counselling
- Contact a debt counsellor registered with the National Credit Regulator (NCR).
- Complete the application process.
- Follow the payment plan created by the debt counsellor, ensuring regular payments to avoid any issues.
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2. Balance transfers for credit card debt
Many credit card providers allow consumers to transfer existing balances. Some may even offer promotional periods where balances can be transferred to a new card with a low or 0% introductory interest rate.
How to consolidate credit card debt using a balance transfer
- Find a credit card provider who offers low fees and long promotional periods.
- Transfer balances from other cards to the new credit card.
- Pay off the balance before the promotional period ends to avoid high interest rates.
Options one and two are the go-to’s for a variety of debts. Whereas option three can be a smart way to consolidate credit card debt.
Let’s go over what we’ve learnt…
Final thoughts
Debt consolidation can simplify debt repayment.
The two main ways to consolidate debt are:
- Debt consolidation loans;
- Debt counselling (debt review)
Each option has its unique perks, but generally, debt counselling (debt review) is the safer and more suitable option. Loans can work well when someone has enough money to comfortably pay for everything and just wants to consolidate their debt. But, applicants who care about affordability and protection may prefer debt counselling (debt review).
If you’re struggling with debt, we could help reduce how much it costs every month and free up some of your income for other critical expenses. Try our online assessment at My Debt Hero to see if you qualify.
