Wise way to settle debts

2010-09-18 09:32

Assuming you have many monthly payments and you are falling behind with them, you could consider debt consolidation. This is a process whereby you take out one loan to settle your many debts, and then you only have to focus on paying off a single loan instead of dealing with many different credit providers.

Eunice Sibiya, a consumer education programme manager at First National Bank, says the most important ­question you should ask yourself when considering debt consolidation is: “Am I disciplined enough to pay off my debts?” There are consequences if you re-finance your car or get a second bond – you risk losing your assets if you ­cannot make the payments.

Sibiya warns: “Don’t use the ­breathing space ­afforded by debt consolidation to incur more debt.” Debt ­consolidation should only be used as a cost effective means of reducing your debt, not accessing further debt.

When it comes to debt consolidation, Consumer Assist CEO Andre Snyman recommends you go to a bank or a ­well-established bond originator that is recommended by a bank.

Under no circumstances should you use ­bridging finance or cash loans for consolidation – these can be extremely expensive and are also not always regulated by the National Credit Regulator.

Be very careful when it comes to who you take out a loan from, he says.

Advantages:

  • You still qualify for credit, so you can still take out a loan. This is not the case once you have been blacklisted.

  • You make just one payment, rather than many, at a reduced ­interest rate. Your monthly payments are lower, too.

  • You have only one creditor to worry about.

If, for example, you owe R16 000 to your creditors, this is how ­consolidation will work:
  • You owe R3 000 to a clothing store (at a monthly interest rate of 25%);

  • You owe R3 000 to a second clothing store (at a monthly interest rate of 25%); and

  • You owe R10 000 to a service ­provider (at a monthly interest rate of 30%).

The average interest you are paying monthly is 26%.

You can now ask for a loan of R16 000 to cancel your debt and in the process you can negotiate a lower interest rate of perhaps 20%. Now, each month, you will have an extra R200 or R300 in your pocket, which you should either (a) save, or (b) add to your monthly repayment to cancel the debt more quickly.

It is also important to ensure that the cost of debt consolidation is less than current costs. In some cases, a ­short-term consolidation product ­increases cost for the consumer due to administration fees.

Debt consolidation is therefore­ ­usually only beneficial for longer term loans of more than six months.

Beware:

  • You could have your assets or ­property attached if you fail to make your repayments.

  • Negotiate a reasonable repayment period as the longer you take to pay, the more you’ll have to pay in interest.

  • If you pay at a fixed rate, it may be set higher than if it were not fixed to cover the bank in the event that the ­interest rate goes up.

However, a fixed rate does allow you to budget more easily as you know there will be no interest rate surprises.

  • Consumers may take advantage of the loan to spend money and get into more debt. The key here is financial discipline.

  • Debt consolidation treats the ­symptoms of the problem, not the cause.

You have to look honestly at how you landed up in financial difficulty in the first place and put in measures, like budgeting, to ensure that you do not go back into debt.

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