Why are debt consolidation loans dangerous?
Debt Consolidation Loans have high interest rates and admin fees. And the higher your loan and longer your repayment term, the more money you pay the bank in interest.
Let’s look at a simple example:
Thandi is in debt
She owes R650,000 with interest and earns R25,000 per month after tax. Her debt repayments per month are R21,000.
Thandi gets a consolidation loan
It doesn’t take care of all her debt, but she decides to consolidate some of it with a consolidation loan of R250,000.
She decides on a repayment period
To obtain the loan, she needs to pay a once-off initiation fee of R1207,50 as well as an ongoing monthly service fee of R69.
Her monthly repayments are calculated
Thandi now pays R6,769 towards her consolidation loan and an additional R10,000 to cover the R400,000 in remaining debt repayments.
She finds out the real cost of consolidation loans
Rates & Fees
|Loan amount (R)||5 000||25 000||50 000||100 000||250 000|
|Term (months)||Credit facility||12||24||48||84|
|Interest rate (%)||20.75||12.9 - 27.75||12.9 - 27.75||14.2 - 27.4||16.3 - 21.7|
|Credit life of insurance R/1000 per month||n/a||2.54 - 4.5||2.54 - 4.5||2.54 - 4.5||2.54 - 4.5|
|Once-off initiation fee (R)||0 - 649.75||1 207.50||1 207.50||1 207.50||1 207.50|
|Monthly service fee (R)||35 - 69||69||69||69||69|
|Monthly repayment (R)||5 155 - 5 816||2 446 - 2 665||2 575 - 3 016||3 002 - 3 880||5 549 - 6 769|
|Total repayment (R)||5 155 - 5 816||29 354 - 31 976||61 800 - 72 380||144 113 - 186 227||466 130 - 568 562|
*Actual rates and fees of a well-known bank in South Africa offering consolidation loans (Jan 2019)
Her new debt of R250,000 was paid towards the R650,000 leaving a total debt of R400,000, but now she also created a new additional debt of R318,562. Her new total debt with interest after paying her R250,000 debt from her consolidation loan is now:
And she will be paying this off for the next 7 years. This is the big reason why banks want you to take out consolidation loans. Interest means profit and that’s what banks survive off.
Of course, there may be times when consolidation loans make complete sense. But it is not the answer to a debt problem. So, what is?
Understanding Debt Counselling
Become debt free with Debt Rescue!
Let’s say Thandi checked the numbers and decided that a consolidation loan was not the answer to her debt problems. She finds out about a process called debt counselling.
Debt counselling is a service regulated by the NCR to ensure fair practice to those who are struggling to live due to debt. Companies like Debt Rescue reduce your monthly payments while legally protecting you and your assets from creditors.
Let’s look at Thandi’s R650,000 total debt and R25,000 monthly income. We see that she is struggling and that R21,000 of her income goes to debt repayments. Instead of moving her debt around and paying additional interest, her debt counsellor will negotiate with her creditors directly to legally reduce her monthly repayments. And in many cases, the debt counsellor can also lower interest rates.
Specialised attorneys ensure she has enough to cover her living expenses without using credit each month and assets like her car are protected.
Thandi got in touch with Debt Rescue who took care of everything.
Her monthly debt repayments were reduced from R21,000 to R10,100. And she was also able to make additional payments to her credit providers on top of her repayment plan. Debt counselling covered all her debt, not just the amount she would have gotten from a debt consolidation loan.
She paid off all her R650,000 debt in 5 years
Request a free, personalised, no obligation debt assessment now!
|Debt Consolidation||Debt Counselling|
|Total Debt: R718,562||Total Debt: R650,000|
|Monthly repayment including fees: R16,769||Monthly repayment including fees: R10,100|
|Paid off in 7 years||Paid off in 5 years|
Consolidation Loans vs Debt Counselling
|Consolidation Loan||Debt Counselling|
|Lower monthly instalments||Lower monthly instalments|
|Good credit score needed||Good credit score irrelevant|
|High-Interest rates, once-off initiation fee, monthly admin fees, service charges and more||Once-off application fee, once-off restructuring fee and a small monthly after care fee|
|Covers debt up to R250,000 – R300,000||Covers an unlimited amount of debt|
|No legal protection of assets||Legal protection of assets|
|One single payment monthly|
(If debt is below R300,000)
|One single payment monthly|
|Debt Increases (high interest)||Debt Decreases|