DEBT CONSOLIDATION LOANS
Debt Consolidation Loans are widely used in South Africa. Many consumers in South Africa consolidate debt because they think it would ease the monthly debt installments.
What is Debt Consolidation Loans
Simply put, it is a loan that combines all debt loans, into one consolidated loan with a financial institution.
Problems with Debt Consolidation
Many consumers are already listed on credit buro’s when debt consolidation is considered. This means that, when you consolidate debts, you will probably pay a much higher interest rate, than when you first applied for the credit facilities. It should be understood that financial institutions are in the business of earning revenue by way of interest. That is there main source of income.
We sometimes see clients that consolidate their debts, only to find that they have turned long-term debts, into short-term loans. This has a very detrimental effect on their cash flow. Very soon, they find themselves working and living only to repay the loan.
Amortization schedules to the rescue
When you take a bond of R1,000,000.00 over a period of 20 years at an interest rate of 9% you will have a monthly payment of R8,997.26.
When you take the same loan amount of R1,000.000.00 over a period of 5 years and you pay an interest rate of 12% you will have a monthly payment of R22,244.45.
Thus it does not make sense to consolidate long-term credit agreements into short term loans.
On the other hand, if one consolidates short-term loans into long-term loans such as a second bond on your property the calculation looks as follows:
If you take an R100,000.00 loan at an interest rate of 12% that is financed as a personal loan, your total interest payable will be R12,976.33 over the entire loan period. Financed on your bond, this same amount at 9% interest will amount to total interest payable of R115,934.23 over the entire loan period.
This is R102,957.90 more than what the initial loan will have cost you. Clearly consolidation is almost always a bad idea.
How do I get out of debt?
If you can not afford your debt installments, the only way in the South African law to get rid of debt is to declare bankruptcy by way of a sequestration application for individuals and trusts or a liquidation application for companies and close corporations.
Is declaring bankruptcy the way to go?
Before considering debt review or a debt consolidation loan, you should consider all other options. Please read through our website regarding sequestration and liquidation before considering any one of these options.
Danie Potgieter Attorneys