For people who are in danger of defaulting on their loan repayments, Penwarden says debt consolidation may be their only option.“Certainly debt consolidation can be a lifeline and is preferable to a judgment or a repossession of your house or car.“Without it, debt consolidation can actually make your financial situation worse,” warns Kevin Penwarden, the chief executive of SA Home Loans. Let’s say you have a home loan of R600 000, a car loan of R120 000, credit card debt of R25 000 and a personal loan of R45 000.(See the table for the terms, interest rates, and monthly instalments applicable to each – link at the end of the article.) You could use your home loan to consolidate your debt, provided you have sufficient equity in your property (the difference between the value of your home and what you owe on it).So you score by using your home loan only if you use it wisely – and the same can be said for debt consolidation loans.The appeal of debt consolidation is that it lets you simplify your affairs by using one large loan to pay off all your smaller debts.
On the other hand, credit cards, store cards and short-term loans incur interest of anything from 21 percent a year to 32 percent over six months.
That would defeat the purpose of using such a cheap form of credit.
Had you bought the TV from a furniture store, you’d be charged, for example, 21 percent interest over 36 months.
(Source: A debt consolidation loan can be secured (for example, a second mortgage) or unsecured (for example, a personal loan). A secured loan is one that is secured by an asset – be it your house or car – which can be repossessed and sold if you are not able to repay the loan.
For this reason, you pose less of a risk to the credit provider, and therefore more favourable interest rates apply than those offered on unsecured loans. With the National Credit Regulator “on the warpath” and the threat of a R300-million fine hanging over African Bank for alleged reckless lending, credit providers have lost their appetite for debt consolidation, Ian Wason, the chief executive of Intelligent Debt Management (IDM), says.