Consolidation loans in South Africa.

19 Jan Consolidation Loans – Let’s dig in deeper

Posted at 11:47h in Loans/Finance by

Have you ever wondered how consolidation loans work? How do you get one? How do they affect your credit? What are the legal implications? Read on for answers to these questions and more.

What’s A Consolidation Loan?

A consolidation loan is when creditors combine all of your debt into a single loan to make payments more manageable. You take out one loan to pay off all the other loans or debt, leaving you with only one to pay off. Usually, people with overwhelming short-term debt, like store accounts, personal loans, and credit card debt do this.

This is better because it usually has a longer term and lower monthly instalment. You can also save on admin costs and only pay interest on one loan, making it much easier to pay off debt.

Benefits and Drawbacks of Taking Out A Consolidation Loan

Consolidation loans have their respective benefits and drawbacks concerning your credit and personal finance. Let’s take a closer look.

Benefits of A Consolidation Loan

Consolidation loans have a lot of benefits, like simplified, reduced payments and bettering your credit score.

 

  • Simplified repayments: You have the option to simplify your repayments into one consolidated loan–so one payment and one due date. This helps to keep and simple budget and lessen missed payments. You might also get a lower monthly repayment and reduced fees.
  • Potentially a lower interest rate: If you have good credit, you might just qualify for a lower interest rate than your other debts, which can help you save a significant amount.
  • Increased cash flow: With benefits like tax-deductible interest in some cases (consult a tax professional for details). You might also mitigate and eliminate annual fees, late fees, and any other charges.
Drawbacks of A Consolidation Loan

Of course, every loan has its drawbacks.

 

  • More interest: This is because of the longer repayment period.
  • Prepayment Penalties: Some loans penalise you for paying them early in the case of accelerated payment.
  • Origination Fees: These are fees a lender deducts from your loan amount as compensation for their work.

How To Get A Consolidation Loan

Consolidation loans in South Africa.

Here’s how Credit Boost recommends you go about acquiring a consolidation loan. We also explain the legal frameworks.

1. Assess Your Financial Situation

It’s a good idea to calculate the totality of your debt, monthly repayments, and credit score. These things greatly impact the terms of your consolidation loan, as well as whether you can get one in the first place. Additionally, not all debt is approved for consolidation.

Ways To Check Which of Your Debts Can Be Included In A Consolidation Loan
  • Talk to your lender about what debts you can consolidate. They will tell you what debt you can include based on internal policies and your situation.
  • Low-risk loans, like car repayments and mortgages, are usually eligible.
  • Talk to a registered debt counsellor. 

2.  Legal Frameworks of Consolidation Loans

The National Credit Act (NCA) 34 of 2005 outlines your rights and responsibilities regarding loans and credit. Also, note that Section 89 of the NCA  stipulates that lenders must assess your affordability before granting a consolidation loan. They must also ensure the new loan improves your financial situation, not worsens it.

3. Compare Lenders and Government Initiatives

Research different lenders! Shop around different banks, credit unions, and online lenders. Moreover, be sure to compare interest rates, fees, terms, and eligibility requirements. You might consider a government debt relief program as well, like a debt review, which might be more suitable depending on your situation.

4. Choose A Consolidation Loan And Apply!

Now comes the exciting part. After you’ve thoroughly and meticulously researched every option available, go ahead and apply for your all-in-one loan. Scrutinise APR (annual percentage rate, aka the cost of borrowing money over a year). Then, it’s time to collect and review proof of income, bank statements, credit reports, and identity documents.

Carefully read the loan agreement. If you don’t understand something, ask–in South African contract law, a contract isn’t valid unless you understand all terms and conditions set out. Understand the terms, interest rate, fees, repayment schedule, and potential prepayment penalties. Most importantly, double-check the proposed agreement is aligned with the NCR‘s and NCA’s credit guidelines.

Now that you understand how consolidation loans work, the impact they have on your financial situation, and the legislative implications, go forth and confidently consolidate your loan. Take your first stride into financial freedom with help from some of South Africa’s best creditors. Contact us now for professional finance guidance and outstanding service.