Debt consolidation may be an option if you have multiple loans and can get a lower interest rate on the single consolidated loan. Picture: 123RF.com
Debt consolidation may be an option if you have multiple loans and can get a lower interest rate on the single consolidated loan. Picture: 123RF.com

With the prime lending rate at a record low, now might be the ideal time to consolidate multiple credit agreements that attract high interest rates into a single consolidation loan.

Debt consolidation can simplify your finances and reduce your overall cost of credit if you can get a better interest rate and save on multiple monthly service fees and credit insurance premiums.

Although most debt consolidation loans are unsecured loans, and therefore more costly than secured loans like your home loan, if unsecured credit is your only option you may be able to get a good deal, especially if you have a history of repaying credit on time.

George Roussos, COO at African Bank, says that given the reductions in the repo rate this year, there is an opportunity for
consumers of credit to consolidate multiple debts to reduce the overall cost of their
existing credit.

African Bank offers consolidation loans of up to R250,000 and the bank's best rate is now 18%. The maximum that a credit provider can charge for such a loan is currently 24.75%.

Capitec's best interest rate on a personal loan that can be used for consolidation is currently 12.9%, says Francois Viviers, the bank's executive head of marketing and communications.

Cowyk Fox, managing executive of everyday banking at Absa, says the bank's best rate for a debt consolidation loan is "around the prime lending rate", which is 7.25%.

"Absa determines a customer's interest rate based on the overall risk profile of the customer.

"A number of factors inform the level of borrowing risk that the bank carries.

"These include the size of deposit and the credit and account history of the customer," he says.

If you're paying the maximum on your unsecured debt, consolidating it would make sense if you qualify for a consolidation loan at a lower rate.

Some creditors, such as African Bank, settle the debts that you're consolidating so that you aren't able to use the consolidation loan for any other purpose.

African Bank's rate is also fixed for the duration of the loan term, so you would score if interest rates rise.

You can also use a consolidation loan to reduce what you're paying towards your debts by eliminating multiple existing debts and paying off the consolidation loan over an extended period. It will cost more in the long run, so take this route only if you need the
relief.

Roussos says the important thing is that you are clear about your objective. You may end up with a more expensive loan for a longer period than your original credit agreements, but if this improves your monthly cash flow, it may be right for you.

"But first understand what you can afford in terms of a monthly instalment and then look at the rates and remaining terms of each debt before you consolidate. Ideally, consolidate into a loan that offers you a lower interest rate," he advises.

For many customers, especially at this time, cash flow is a bigger issue than the rate they pay. Roussos says African Bank customers typically make a decision based on cash flow and whether the consolidation will give them respite.

Viviers says consumers should shop around for the best deal and consider the total cost of credit, including the initiation fee, monthly fee and credit insurance.

He says loans with shorter terms generally attract lower interest rates than those taken over the long term, and though the monthly instalments are higher, they cost less in terms of total repayment.

Fox says there is no one-size-fits-all answer and that each person's financial situation is unique. The decision to consolidate debt will be determined by his or her financial position at any given time. "The best advice would be for people in financial distress to speak to their bank immediately."

While most banks have reported a significant decline in loan applications since the start of the national lockdown, Google's Quarterly Business Review for 2020 shows that "personal loans" and "personal loan calculators" are among the top search terms.

Research by credit bureau TransUnion shows that almost eight out of 10 South Africans say their household income has been reduced because of the Covid-19 crisis.

Almost 70% of the people surveyed in the TransUnion study said they were concerned about paying their bills.

Of this number, 46% said they would not be able to pay their utility bills; 42% said they don't see themselves being able to pay their rent; and 39% said they won't be able to pay their cellphone bills.

If you're expecting problems paying your bills, borrowing money is not the answer. The same goes for when you're battling to service your debts - taking on more debt won't help. You either have to increase your earnings, which is extremely difficult at this time, or cut your expenses.

Critics of debt consolidation say it's no silver bullet because these loans merely shift debt from multiple credit providers to a single lender.

They are only helpful if you have the discipline to resist taking on more debt as you pay down the consolidation loan, they say.

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