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



15 CommentsLeave a comment

  • I have been told that if I go for debt review, my FNB account will be frozen, due to the Overdraft. Is this correct? I want to stay with FNB if I can. Am I able to open a seperate Bank account with FNB if this is the case?

    • This is FNB’s response:
      Spokesperson: Athaly Khan, Chief Operations Officer, FNB Regulatory & Operational Compliance Centre

      16 April 2019; FNB does not freeze a customer’s transactional account upon application of debt review.

      Depending on a customer’s personal circumstances, a cap may be placed on the overdraft if the customer has this facility , this is to help the customer manage repayments better.

  • I have also gone through the consolidation route, with little success, as my debt just increased! I have since found a Debt Counselor who gave me free financial advice on my situation, and also reduced my interest rates with the process. Her name is Maria and she works at Finance Help 24. . Hope that helps!

  • But what about people who have opted for Debt Review? Surely there should be help or relief for them? Can these people qualify for Debt Consolidation?

    • The National Credit Act specifically prohibits a bank from offering a debt consolidation loan if the consumer is over-indebted or under debt review. This would be considered reckless lending. Debt review is in effect a consolidation of your debts as you pay only one amount each month which is then divided between your creditors. A good debt counselor would also have negotiated lower rates with your creditors

  • Maya,
    I am on debt counselling for the past three and a half years. I have never missed a payment to the distribution agency but not happy because it seems as my debt will never be paid off because of the interest rates. For example my vehicle will only be paid fully by 2018 and the remaining amount outstanding for all my debt is around R80 000 (only around 28 000 was paid over the past three and a half years).

    Please advice whether FNB as my bank will assist me with a debt consolodation loan as the interest rates are killing me and I am not moving forward.

    • You cannot take on any loans under debt review, but I suggest you ask your debt counselor to work out a better solution. The debt counseling rules that were agreed to generally aim to have people debt-free in five years. This includes some concessions from the credit provider in terms of interest rates

    • If you decide to consolidate your debts do your calculations very carefully. Look at the TOTAL cost of consolidation – there are initiation fees and if you increase the length of time in which to repay the loan the interest cost will be higher.

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