Should I apply for debt consolidation?

“I am really committed to getting out of debt and I have R4000 a month to do so. I currently owe R30 000 on my FNB Credit Card, R25 000 on my ABSA credit card and I have a loan with FNB for R15 000. Should I consider debt consolidation?” asks Nina.

Maya replies: You should only consider debt consolidation if the R4000 per month you have available is insufficient to meet your current debt repayments. By consolidating the debt you can extend the period of your repayments thereby lowering the monthly repayment amount. However you need to remember that by extending the repayment period you will increase your total interest payment and there are also administration costs, so it is not wise to use debt consolidation purely as a “convenience”.

According Alastair Bye Head of credit at FNB Smart Loans, if you cannot afford your existing monthly repayments debt consolidation would be a good option. You are probably paying 24% on your credit cards and around 32% on your personal loan. Bye recommends you speak to the banks and see what they offer in terms of rates and fees. Bye makes the following points:

  •  The best rate you likely to pay would be around 11%, and the highest 32%. This depends on your risk profile. 
  • You will probably need to take Credit Life cover. Rates start at around R3 per R1000 so if you took a loan of R70 000 the premium would be at least R210 p.m.
  • You will have a monthly service fee of around R57 p.m.
  • You could be charged an initiation fee of R1140.

Based on these assumptions and if you have a good credit profile you would pay an installment of roughly R1 800 p.m. if you were given a full debt consolidation, with a term of 60 months. If you used your full R4000 to pre-pay the debt you would be debt free in 21 months.

If you are seen as higher risk, the highest installment you could expect for a period of 60 months would be around R2,800 p.m. If you used your full R4000 per month to pre-pay the debt you would be debt free in 28 months.

Bye says if you do not qualify for the full R70 000 loan but only R50 000 for example, you can at least use that to consolidate some of the debts and partially improve your monthly financial situation.

This article first appeared in City Press



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