When debt consolidation is not the solution

Debt consolidation is often seen as an easy way to get out of debt. Theoretically debt consolidation is a good solution if you are struggling to meet your many repayments. You are able to consolidate all your debts by taking out one single loan and using that loan to settle the other seven or eight loans. You now only have to service one loan and you can opt to have a longer repayment period to make the monthly payments affordable.

However this only works if you have the discipline to cut off all other credit, if not, it is a one-way ticket to a debt trap.

Marcus wrote to us because he is drowning in debt. Despite his senior position and pay package to go with it, his lifestyle has exceeded his income. He had to borrow money to pay school fees, meet car repayments and general household expenses. Today his debts exceed R200 000.

Marcus’s first request was to consolidate all his debts with the various banks and micro-lenders. However the banks declined his request. Debt consolidation can only be extended if you have a reasonable credit record and can afford the repayments. Marcus did not meet these requirements.

In addition Marcus had already attempted to consolidate his debts a year ago by taking out an additional loan with FNB. Marcus used the loan to pay off his high interest bearing loan with a micro lender which was a good strategy; but unfortunately rather than focusing on paying off his debts, Marcus took out a further loan with the micro lender and landed up in a worse situation than he started off with. He now had his FNB loan, a loan with Nedbank, Absa and Capitec, car finance as well as the loan with the micro lender.

Alastair Bye, head of credit at FNB Smart Loan says people often believe that debt consolidation will solve all their money problems, but it requires a significant amount of discipline. “People understand that they need to cut back on expenditure and they may manage to do this for a few months, but they find it hard to keep this up for the three or four years it will require them to pay the loan off”. As a result some people find that debt consolidation only ends up in further debt later on as they take out even more debt after the consolidation.

Debt consolidation can actually cost more as the debt is restructured over a longer period. Although your monthly repayments are lower, your total interest paid is higher. However Bye says a customer with discipline would use the freed up cash flow to repay the loan quicker and reduce the total cost of credit. “Debt consolidation only works with discipline,” says Bye.

Speak to your creditors first

Bye spoke to Marcus and advised him to contact each of his creditors to see if they would restructure the loans to lower his repayments. “It is clear that Marcus will have to go under debt review. Our view at FNB is that rather than wait for the debt counsellor to come back with a repayment plan, we will try to offer the client the reduced interest rate and fees as per a debt review without the client having to pay for debt counselling services,” says Bye.

According to Capitec a client has the option to go to a Capitec Bank branch and apply for rescheduling or for a consolidation of his or her loan. “In this case, the client applied for consolidation and rescheduling, but was not eligible according to his affordability calculation,” says Charl Nel, head of communications.

Nedbank says that as the loan is currently already a 60-month loan, the bank is unable to extend the period further and that debt review is the best option.

Absa offered to restructure his debt into his home loan, however this was not an option for Marcus as he would require his wife’s permission and she is not prepared to take on his debt (see Marriage and Debt below)

Unfortunately the fact that Marcus has taken on more debt over the last year when he was already in difficulty has counted against him. The general feedback from the banks is that Marcus has to reassess his lifestyle expenses since he has personal and vehicle finance debt that is excessive for his specific salary. His BMW repayments make up a significant portion of his repayments.

It is most likely that Marcus will have no option but to consider debt review but he could still approach the National Debt Mediation Association to assist in speaking to those creditors or banks that were not willing to negotiate. Sometimes it helps if the creditor understands that other providers are already taking a cut in fees so they do not feel that they are the only ones losing out. Bye has advised Marcus to still meet with a debt counselor and fully understand the situation before committing to debt review.

Marcus is still on the tough road of dealing with his debt but he has learnt this lesson: “I will no longer buy anything on credit and I will not allow myself to be pushed around by endless demands by people you cannot satisfy”.

At the end of the day the only person who is going to get you out of debt is you. There may be ways to help your cash-flow and give you a head start, but you have to make a real commitment to tighten the belt and commit to a long-term budget. And remember, the money you borrow is someone else’s savings.

Marriage and debt

One of the challenges facing Marcus is that although he is married in community of property and his wife is technically liable for his debts, his wife will not assist him in settling his debts.

This presents several challenges and has put a strain on their relationship. Firstly he is unable to consolidate his debt into their joint mortgage which would be good solution. He requires her permission to do so. Secondly under debt review the counsellor would have to consider their combined income, yet he cannot rely on her income. This may result in him being declined for debt review.

This raises the importance of money and marriage. Under community of property (COP) both partners are fully responsible for the debts of each other. This places his wife in financial difficulty if he defaults as the creditors could pursue her, so she needs to understand that an amicable solution may be the best option. If a couple has signed an ante-nuptial contract then the debts are separated and his wife in this case would be protected.

This also highlights the importance of discussing money within the family and only taking on debt that both spouses have agreed to. In this case it appears that Marcus feels that he is under a great deal of pressure to provide for his family without her support.

In the early years of your marriage it is important to discuss your finances and to understand who pays for what and what contribution you both make to the family. It is paramount that you each have your own savings plans and that any debt is fully discussed and agreed to between both partners. If one partner is taking on excessive debt to maintain the family’s lifestyle, this can only end in disaster.

 This article by Maya Fisher-French was first published in City Press

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