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Debt Consolidation

What is Debt consolidation?

It is when you put all your debt into one single account, instead of paying off many accounts at the same time. It’s like taking out a big loan to pay off smaller loans. It usually means the debtor delays your repayment of debt from paying it off immediately to paying it off on a long term period.

You get three different kinds of debt consolidation loans:

  • Formal debt consolidation are offered by some banks. It is when they consolidate all your debt (credit cards, home loans and car loans) into one big loan.
  • Secured loans are when you put up an asset as extra security if you end up not being able to pay. You’re less of a risk for credit providers, because they can repossess or sell your house or car to make up for the lost payments.
  • Unsecured loans are personal loans where you don’t have to put up an asset for extra security, but it makes you a bigger risk for credit providers.

Debt consolidation is usually a secured loan.

What are the benefits?

  • Control and more organised.

It gives you more control over your debts, knowing that it is all in one place and you only have to “answer to” (pay) one creditor. It creates convenience, because it is less stressful and gives you a quick fix to your long term problems.

  • Lower interest (fixed)

With one single account that means all the other extra fees will be eliminated and you can pay a lower amount of interest. The interest is also a fixed rate, which means no matter how much inflation goes up or down, the interest you pay on the account stays the same.

  • Future benefits

You are more likely to get credit and lower interest rates in the future.

  • A clean start: 

Debt consolidation gives you the option to pay off all your debts in the shortest time period possible.

  • Less fees

With just one single account you end up saving on multiple fees, service charges and debit order charges.

  • Improves your cash flow

The overall payment will be lower than all the seperate payments together. This means you’ll end up with some free money at the end of the month.

  • Caution: instead of spending it and creating more credit, put it in a savings account.
  • Credit life insurance

Having debt consolidation means you have the benefit of credit life insurance on your loan that covers you in case of death, disability or retrenchment.


Not everyone qualifies for formal debt consolidation. First the credit provider must make absolutely sure that you will be able to afford and pay off a fixed amount every month. Then they take a look at your credit record and credit score.

What is a credit record and credit score?

A credit record shows if you had previously paid something on credit and if you were able to pay it all back in a certain amount of time.

A bank or provider scores you in terms of what you can afford and researches your credit history. Low risk customers usually qualify for the prime rate at some banks, which is 8.05% interest rate. Some banks use risk-based pricing to determine the final price which the customer is likely to pay off every month.

The requirements (summarized):

  • You have to earn a certain minimum salary.
  • You must have a good credit record
  • You must have a solid asset base
  • You must have a better individual risk profile.

Caution: Is it right for you?

Debt consolidation can give you a false sense of security. It does not make your debt go away and it does not result into savings – you still owe that amount of money. You may have to pay off your debt over a longer period. Sometimes you still have to pay off the debt for something that you had to dispose of.

Debt consolidation should only be there as a last resort for people who feel financially stressed or for people that are really desciplined. You must make sure that you will be able to pay off the fixed amount (with fixed interest) every month and that you’ll still be able to cope without that money.

Try to pay off debt on your own:

Instead of applying for a debt consolidation loan, you can try to pay off your debt on your own. Cut your spending, close accounts and cancel your credit cards.

You can start by paying off the short term debts (less than 5 years) first.

You can file for bankruptcy, take out another mortgage on your home or you can cash out your life insurance policy.

You can change your lifestyle by learning to live with less.


Make sure that the debt consolidation company’s counsellors are qualified and that they have the necessary certifications. Sometimes they can rip you off, because they are a scam.

Look for the lowest fixed rate as possible. Check if the loan offers terms that can be favourable in your defence.

Check out all providers before you borrow and compare them. See which company offers the most benefits for you.

Seek lenders that have good reputations and see if they offer fair interest rates. You can do this through word of mouth: asking your friends, family and colleagues about their experiences with the company.

If something sounds too good to be true it usually is. Don’t trust them and you don’t have to feel obliged to say yes to the first company you check out.

Choose a company that allows for individualised payment loans. You may pay more at first, but you will save more on the long run.

Work out a 5 year plan. It gives you a better chance to stick to your financial commitment of paying off the debt.

Look for a debt consolidation agency that offers you the necessary resources such as workshops and/or reading material (booklets) to learn about good financial habits.

Find a company that will set up a free meeting with you to discuss your debt consolidation.

Read the fine print. Make sure there are no “hidden” fees and read the Terms and Conditions over carefully. Ask them if you don’t understand something. If something bothers you or don’t sit well with you, go to another agency.

Cancel any further credit or debt by paying your monthly payment with cash.

Learn from your mistakes:

Study your credit report and try to figure out what happened or why you accumulated so many debts. If you know what you did wrong, you’ll know not to make that mistake ever again.

Define your debts:

If you know what your debts are or where you spend too much money (more than you earn), you can know what you can pay off on your own and which debts you can’t. Evaluate your spending habits. See what you can do without.

Where does it come from? Set up a budget and see which are your biggest expenses.

What do you owe? Identify which areas of your budget is the problem.

Who do you owe it to? Know who you owe and what their conditions are. Some places prefer that you pay off your debt after a certain time period.

Decide which debts you want to consolidate.
Consolidating the debts that weigh on you the most will “save” you money meaning you won’t have to spend too much money on fees but not necessarily saving money to buy more stuff and make new debts.

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