How Do Consolidation Loans Work?

The standard way to consolidate your debts in South Africa is to increase your home loan and use this additional money to pay off all of your little debts, such as your credit cards, store cards, overdrafts and short-term loans.

As regards interest rates, you can expect to pay 17% to 30% on store cards and credit cards, and up to 40% on short-term loans, depending on your credit record, of course. Whereas, for a home loan, you will only pay a 12% interest rate.

Consequently, once you’ve gotten yourself car finance, a cellphone contract, a Woolies store card, an emergency credit card etc., paying your bills becomes a complicated monthly ordeal. In fact, this means you are more likely to dread attending to your debt repayments each month and subsequently will put off handling your financial affairs as long as possible, which could lead to all sorts of problems.

Especially considering that all of these high-interest, short-term loans have different fees, terms, interest rates etc. It suddenly becomes all too easy to start making mistakes in the form of late payments, paying the incorrect amounts into the wrong accounts or even forgetting about payments altogether.

Conversely, consolidating your debts into your home loan would not only mean reduced monthly debt repayments for you, but would, moreover, turn your dreaded debt repayment duties into a quick, effortless once-monthly matter that won’t take you but a few minutes, tops.

Let’s say, for example, the table below depicts the various debts you owe, with their corresponding interest rates. The last two columns on the left show what you would pay on a monthly basis towards all of your debts, while they are UNCONSOLIDATED, as opposed to if they were CONSOLIDATED into your home loan.

As you can see, you would pay a great deal more towards your unconsolidated debts – R9, 175 in total monthly debt repayments. This is because the respective interest rates of these short-term unconsolidated debts are a lot higher than the 12% interest rate you pay on your home loan of R500, 000.

Naturally, the reason why the monthly interest rate for your mortgage payments is so low is because you are paying your home loan off over an extended term of 20 years. Now, this may seem like a long time, however, it’s actually the standard term for paying off home loans.

On the other hand, if you were to consolidate your little debts into your home loan by increasing your home loan by R100, 000 – which is the total outstanding amount you owe on all of your small debts (R20k + R30k + R50k), you would inevitably pay lower monthly instalments – and this is what these hypothetical figures are going to illustrate for you.

How it works is, you would use this R100, 000 increase on your home loan to settle all of your small debts once and for all. Accordingly, you would no longer pay high monthly interest rates of 18%, 25% and 30% – which are only going to increase over the years.

Instead, once your debts are consolidated, you only pay a single monthly instalment towards your increased home loan of R600, 000, at a far better interest rate of 12%. Thus, you would only pay R6, 600 a month.

To sum up, you would save thousands of Rands, which you could then put towards your monthly home loan (mortgage) repayments. Hence, you’ll become a debt free, fully-fledged homeowner far sooner than you could have ever imagined.