Debt Consolidation is one of Google’s most frequently searched terms by consumers that are facing difficulties with their monthly debt obligations.
Below is a relatively common scenario that takes place when an over-indebted consumer searches for a Debt Consolidation loan:
Scenario: Mr. A Peters earns R 18 000 per month (Nett salary); he needs R 12 000 per month to cover his living expense (such as food, school fees, insurances, rent and other essential living expenses). Therefore he only has R 6 000 available to cover his existing Debt obligations.
Here’s a list of his existing debt obligations (Please note these figures are estimated for the purpose of this example):
- Personal Loan 1: R 1 800 monthly with an outstanding balance of R 38 000 with an interest rate of 28 % pa. The interest payment on this loan could be as high as R 886 pm.
- Personal Loan 2: R 2 200 monthly with an outstanding balance of R 56 000 with an interest rate of 26 % pa. The interest payment on this loan could be as high as R 1 213 pm
- Personal Loan 3: R 3 200 monthly with an outstanding balance of R 86 000 with an interest rate of 26 % pa. The interest payment on this loan could be as high as R 1 863 pm
- Store Card 1: R 800 monthly with an outstanding balance of R 8 000 with an interest rate of 23 %. The interest payment could be as high as R 153 pm.
Mr Peters needs to pay R 8 000 per month on his monthly debt obligations. His interest payments are estimated at R 4 115 per month. This means that when he pays R 8 000 to his creditors, they first take their interest portion of R 4 115; then the balance of R 3 885 goes to his outstanding capital debt of R 188 000.
Now just looking at Mr Peters’ scenario above, it is evident that he does not have enough money to survive the entire month without having to rely on credit. A consumer in his situation would be over-indebted by R 2 000. As you can see; it will be extremely difficult for Mr Peters to get rid of the pay day loan, as he requires this every month until he gets his next pay cheque.
So let’s say we gave Mr. Peters a Debt Consolidation loan of R 188 000 @ an interest rate of 32 %. His interest payments will now go up to R 5 013 pm. Making this loan more expensive in terms of interest payments. His monthly instalments will decrease slightly to around R 7 500 pm over a longer period in most instances.
Now, Mr Peters won’t be getting pesky calls from multitude of credit providers but instead, he will only get one call in the event that he may default on payment.
Therefore, looking at the above mentioned scenario, Debt Consolidation does not really help the consumer out of their situation as much as Debt Review can. Debt Review reduces interest rates (making the debt cheaper) and reduces the instalments by nearly 50 %; this then increases Mr. Peter’s cash flow tremendously and he now can enjoy his salary because he does not need to dependent on credit to make it through the month.
Different types of Consolidation loans:
Unsecured – Personal loans: Which generally bares a higher interest rate of an estimated 32 % per annum.
Secured – Home loans: If you have a bond and have to extend your bond to cover all your outstanding unsecured debt, provided that you can afford the increase on bond repayments; this may possibly be your best option as this would considerably reduce the interest payments and monthly instalments.
If you need an advisor to assess your situation and point you in the right direction on whether a Debt Consolidation loan is viable for you, please contact us on 0861 111 159 or simply complete the form above for a free call back.