Debt Consolidation Is a Solution For the Over Indebted
If you are officially over indebted, or you’ve been declared as such by a debt counsellor, debt consolidation could be an effective vehicle to transport you out of the mess.
Even if you have been prohibited from taken on any new credit in terms of the NCA (National Credit Act), a debt consolidation loan is the one “credit” exception that’s available to you as long as it’s specifically used for settling your debts.
For those over indebted consumers thinking a consolidation loan could be a golden cash cow it’s worth noting that the NCA “requires credit providers to take reasonable steps to ensure that other obligations are settled”.
In other words, any lender providing a consolidation loan has a duty to ensure that the proceeds of the loan are specifically used to pay off the over indebted consumer’s creditors and not used for any other purposes.
For a debt consolidation loan to be effective, it should come at a lower rate of interest than the rest of your debts
Debt consolidation is also referred to as debt displacement as it transfers debt from multiple creditors into just one creditor to save on interest, assist cash flow and simplify the administration of managing the indebted person’s creditors.
5 Ways Debt Consolidation Can Help Over Indebted People
- The debt consolidation loan is used to settle all your individual debts & creditors, leaving you with just one large (consolidated) debt to pay off with one affordable monthly repayment
- Helps reduce your monthly debt payment
- Reduces interest & costs on multiple debts & provides some cash flow relief
- Helps simplify your monthly expense budget & allows you to see exactly how much & who you are paying
- Helps to see exactly how much over indebted consumers owe in total & provides encouragement seeing the overall debt amount decreasing every month
Need a Consolidation Loan?
Who Qualifies For a Consolidation Loan?
Whilst most of the main stream banks offer debt consolidation loans they are generally reserved for their low risk clients only.
Before reintroducing their debt consolidation loan offering, Absa even scrapped this type of loan due to their clients abuse of it by using it for their own purposes and not for paying off their debt as it was intended.
In the event of the bank now providing a debt consolidation loan, they now take charge of settling their clients’ debt directly with their creditors.
This strategy seems to have been followed by the other banks that offer consolidation loans which should be fine for the consumer who is genuinely interested in becoming debt free.
One of the best ways to secure a debt consolidation loan is to borrow the money from your mortgage as it will come at a lower interest rate and is probably the cheapest form of credit.
Whilst getting a loan to pay off debt is usually not recommended, debt consolidation is different in that it allows you to clear all your individual debts and save on interest & other costs.
If you’re wondering what the difference is between getting a personal loan to pay off your debts and a consolidation loan to do the same thing, well a personal loan is usually unsecured and comes at a far higher rate of interest.
So not only will you not be saving anything, but you could also be tempted to use some of it for other uses which could put you into greater debt.
According to Capitec the best rate of interest on a debt consolidation loan would be as low as 12.45% which is considerably lower than the interest charged on an unsecured personal loan.
Need a Consolidation Loan?
Debt consolidation can be an effective tool to help over indebted people become debt free but it is vital that the consumer is not tempted to draw on the consolidation loan for their own use.
It is therefore important for the proceeds of the loan only to be applied to pay off the consumer’s creditors.