Debt consolidation no quick fix
Nedbank debt consolidation loans are made “primarily” to transactional clients of the bank and only “riskier clients” are eligible for such loans, says Warren Tromp, head of value analysis at Nedbank Personal Loans.
Hannalie Crous, Credit Manager at First National Bank (FNB) Retail, explains that the bank’s debt consolidation offering is only for “low risk customers” and is a small proportion of the number of loans the bank grants in a month.
Absa scrapped its debt consolidation product last year in response to the misuse of these loans by consumers who do not use the loans to pay off their debts. However, since many of its clients have taken out loans from other lenders at higher interest rates than those offered by Absa, the bank recently reintroduced a debt consolidation product, Jan Moganwa, Managing Director of customer solutions at Absa Retail and Business Banking, says.
Regarding Absa’s new product, the bank will settle the customer’s existing debt directly “and therefore remove the possibility for a customer to be tempted to tap into this facility”.
This seems to be a new distinguishing feature of debt consolidation loans. If you get a loan from African Bank, Capitec, FNB, or Old Mutual, they will pay your creditors on your behalf with the loan proceeds.
Alfred Ramosedi, group sales and marketing manager at African Bank, said the bank will settle your debts only with registered credit providers. In other words, if you borrowed from a friend or relative, or a loan shark, the bank will not pay them.
According to Crous, when a credit provider grants you a debt consolidation loan, the National Credit Act (NCA) “requires credit providers to take reasonable steps to ensure that other obligations are settled” . This suggests that a credit provider who issues a debt consolidation loan has a responsibility to ensure that the money is used to pay legitimate creditors. Check out for Fast and Efficient Application
Most consumers who visit the website of debt counseling firm DebtBusters are looking for debt consolidation loans, says Ian Wason, chief executive of the company.
Shirley Smith, COO of Old Mutual Finance, says demand for debt consolidation loans has increased since Old Mutual launched its product a few years ago. Ramosedi says the African Bank has also seen a significant increase in demand for these loans over the past year.
According to DebtBusters, 78 percent of South African households are in debt and South Africans are among the most indebted people in the world. Wason says the two main reasons for our rampant debt are financial illiteracy – or a misunderstanding of how debt works and how to manage it – and the use, or misuse, of personal loans to pay off debt. existing loans.
Borrowing from one lender to pay off another is usually a bad idea and a sign that you may be in debt. Debt consolidation is not quite the same thing because you are borrowing from one lender to pay off all of your creditors.
In doing so, you simplify your business – because you go from multiple lenders and debts to one lender and one debt – and you save on the costs of servicing multiple debts. These fees include monthly administration fees and credit insurance premiums.
For a debt consolidation loan to be viable, it must attract a lower interest rate than the rest of your debt and improve your cash flow.
What is the difference between a personal loan and a debt consolidation loan, you may be wondering. When you get a personal loan, it can be for anything. The lender pays the amount loaned to you and you spend the money the way you want, whether it’s a holiday, to cover an emergency expense, or to consolidate debt.
If you are planning to use a personal loan to consolidate your debt, be careful. If you’re not disciplined you could get into more debt, so make yourself accountable to someone who will make sure you use the money to pay off your debts. Additionally, personal loans tend to be expensive as they are unsecured loans. The maximum a lender can charge on a personal loan is currently 28% per annum, although your rate is determined by your individual risk profile.
Debt consolidation loans are also unsecured loans, so the same maximum applies. That is why it is imperative that you negotiate a favorable interest rate with the lender offering the debt consolidation loan.
With the exception of Capitec, the banks wouldn’t be drawn to what you can expect to pay on a debt consolidation loan. André du Plessis, financial director of Capitec, specifies that, if the rate depends on the client’s risk profile, the bank’s best rate is 12.45%.
A mortgage bond, which is a secured loan, is usually the cheapest form of credit – currently 19% is the maximum a lender can charge you for a home loan. However, most people pay the prime rate (10.50%) plus one or two percent. For this reason, debt consolidation using a home loan is preferable to a debt consolidation loan or personal loan.
Use of your mortgage
There has been a “material” increase in the number of clients who are considering using their home loans to consolidate debt, said Kevin Penwarden, managing director of SA Home Loans.
“Interestingly, this is not a sudden or sharp ‘spike’, but rather a slow but steady increase – revealing and consistent with the growing financial pressure faced by so many consumers and consumers. borrowers, ”he says.
In order to use your home loan to consolidate debt, there must be equity in your property, which is the difference between the property’s value and the amount owed. If you have equity in your property, you may be eligible for another loan against the property. You can do this with the bank that issued the mortgage or by changing the mortgage provider.
When using a home loan to consolidate debt (lenders often call this “refinancing”) the key is to pay off the borrowed amount as soon as possible. You don’t want to stretch the debt over the life of the bond because that would charge you a lot more interest.
When you request another bond to consolidate your debt, Penwarden states that the lender will look at all household income and expenses, including the costs of servicing existing debt. If your budget is stretched to the limit of existing debt commitments, the lender is unlikely to grant the request.
“However, if the client can demonstrate that the debt consolidation exercise will improve household cash flow and thereby make the mortgage comfortably affordable, this can be factored into our credit decision,” said Penwarden.
Beware of the additional burden
Whichever way you look at it, a debt consolidation loan is a loan, so you need to approach the product with caution. Experts agree that this is not a quick fix; it will cost you in the long run. Once you get one of these loans, take no more credit.
“Think carefully before taking on additional debt, including a debt consolidation loan,” says Hannalie Crous, credit manager at First National Bank Retail. While consolidation can improve affordability, it is only beneficial if you use the additional cash flow to improve and strengthen your financial situation, and if you refrain from borrowing after consolidation, she says.
Jan Moganwa, Managing Director of Client Solutions at Absa Retail and Business Banking, says that while debt consolidation may seem like a quick fix, you have to remember that it usually means longer repayment periods and invariably high payments. ‘higher effective interest over the entire term of the contract. a loan.
“And, if debt consolidation is an answer to financial stress, you need to exercise prudent financial discipline to deal with the problem,” Moganwa said.
Alfred Ramosedi, group sales and marketing manager at African Bank, says consumers should avoid taking on more debt while paying off their debt consolidation loan. Likewise, if you agree to a consolidation plan but fail to meet your monthly payments, the result will be “credit damage”. [an impaired credit report] and sanctions, he said.
When a debt counselor has found that you are over-indebted and has taken you into debt counseling, you are prohibited (under the National Credit Act) from incurring new debt except for a debt consolidation loan for the specific purpose of settling other debts.
Ian Wason, managing director of debt counseling firm DebtBusters, says that to his knowledge debt consolidation loans to over-indebted consumers “have never been made or tested,” suggesting the market is reluctant to offer a loan. such product to over-indebted consumers. -indebted consumers.
Wason says the average consumer in debt has five credit agreements and many could benefit from consolidating their multiple monthly payments into one monthly payment, if only from an administrative standpoint. “It also means consumers have a much better idea of the total amount they owe,” he says.