A Rough Guide To Debt Consolidation

At SA Home Loans, we pride ourselves on being a responsible lender, and we don’t want our clients to struggle with debt repayment. One of the options available to homeowners is a debt consolidation loan which offers many advantages when used sensibly.

A debt consolidation loan is a loan taken out to pay off several other smaller loans, as by consolidating smaller loans into one larger loan can allow you to reduce your monthly debt repayment and improve your cash flow. This is achieved by securing a lower overall interest rate, as well as allowing you to extend your repayments over a longer period, if you choose. Typically debt consolidation involves replacing high-interest short term debt (such as store cards, personal loans etc) with a lower interest rate loan which also usually has a longer-term – typically your home loan. If you own property, you can apply for additional funds on your existing bond and use the money to repay the short term, expensive debt. To draw extra funds from your bond, there must be positive equity in your property (i.e. the value of the property exceeds the current outstanding loan amount).

Debt consolidation also allows you to make a ‘clean start’, by converting your existing debt commitments into a single, manageable monthly loan payment. This also saves on multiple fees, service charges and debit order charges on the various loans. The result is a lower monthly repayment compared to the combined monthly repayments of the smaller loans, and an improved cash flow.

However, using debt consolidation wisely requires financial discipline, without which it can actually make your financial situation worse.

It’s important to understand that, by consolidating short term debt into a long term loan like your home loan, effectively you could be extending that debt to up to 20 years (the repayment period of your bond). This means that, unless you pay off those short term debts within the original shorter period, in the long run you will pay much more interest on that debt.

What can you do to prevent this? The best approach is to pay as much of the “savings” you achieve from debt consolidation into your bond every month as soon as you can afford to. This will allow you to reduce the overall interest on your bond and save you a great deal in interest expenses.

The danger of debt consolidation is that, if you suddenly find yourself with a “spare” few thousand rand every month, you may be tempted to spend the “extra” cash on current consumption expenditure. If you do so, in no time at all you may be back in trouble, with no options left. So it’s important to avoid falling into the same spending patterns that created your original predicament of over-indebtedness.

As a general principle, we should not pay short term expenses with long term finance (debt). However, if you are struggling to meet your monthly commitments, this may be one of the only immediate options open to you, and may save you from the serious consequences of defaulting on your loan repayments. Debt consolidation can be a lifeline and is certainly preferable to a judgment or a repossession of your house or car. However, as a responsible lender, SA Home Loans always recommends that your short-term debt should be repaid as quickly as your circumstances permit.