Consolidate debt into one payment
Although many people turn to debt consolidation as a means to reduce what they are paying, consumers should be aware what they are signing up for. People often attempt to roll shorter term debt like credit cards and store cards into a longer term loan in order to reduce the monthly payment. What they are in fact doing often carries a double penalty. Firstly, a typical 5 year consolidation loan would result in consumers paying far more than double the original loan amount when adding the fees and interest. Often one can see that after credit life insurances and monthly fees are added, one could typically pay back R260 000 on a R100 000 loan. Taking that same example of the R100 000 loan, with a monthly instalment of around R4300, only R680 would come off the capital sum. The rest would all go to interest and fees in month one.
The reason for this leads me to the second penalty consumers face with consolidation loans. Credit cards, overdrafts and store cards are called Credit Facilities in the act. It really means that one can pay back and use the funds as one sees fit and can keep the facility open. This is in contrast with a Credit Agreement like a fixed term loan. In terms of regulations, Credit Providers can charge ten percent more in interest for Credit Agreements that Credit Transactions. Consumers are therefore often exchanging cheaper credit facilities for more expensive agreements only because the monthly instalment is less. One could use the analogy and say “would you still borrow from Peter to pay Paul if Peter was charging you more in interest?”
Debt Counselling or Debt Review can also consolidate your debt into one payment but it will reduce the interest. It is always advisable to look carefully at all the options before committing to such big decisions.