Debt Consolidation Overview - How can you use your home loan to consolidate your debt?

Debt Consolidation is a process of 'debt displacement' - the moving of debt from many different accounts into one account to save on the total amount of interest paid or to help with cash flow. Savvy debt consolidation and debt management is all about reducing the amount of interest, and monthly charges you are paying on your outstanding debts.

There are 2 options:

  • - Through an unsecured consolidation loan

An unsecured consolidation loan is one where there is no underlying asset (like property) being used as asecurity for the loan. Using an unsecured consolidation loan can be quite costly from an interest rate and monthly payment point of view. These are best suited for smaller debts of under R50,000 and are paid over a shorter period of time. It is important to compare interest rates as well as costs associated with consoliodation as you do not want to move a credit card that attracts a rate of 15% and can be paid off in 10 months into a consolidation loan at 30% paid over 60 months! It is best to discuss the various options with your Bond Busters consultant to secure the best consolidation solution for you.

An example of a secured consolidation loan is your home loan. Home Loans are your cheapest source of finance due to it being secured on your property.

Therefore if you have outstanding short term, or unsecured debt, you should consider using your Mortgage to take advantage of the reduced interest rate, one monthly repayment and one monthly account fee. Consolidation through your mortgage is only possible if there is available equity. Equity is the difference between the outstanding mortgage loan balance and the market value of the property.

Other debts that can be consolidated into your home loan are as follows:

The interest rate on the above can range from a few percentage points below prime.

Remember, a clean credit and bank record (no returned debit orders or bounced cheques) are prerequisites for any lending. If you do not have a clean credit or bank record speak to your Bond Busters consultant about how we can assist you with providing you with a remedy for your record through our Debt Solution offerings.

Bond Busters are the only independent mortgage brokers in South Africa. We assist the home owner in securing the best property based debt solution available in South Africa.

Call us on 0861 287 837 to find out more, or complete our online enquiry form.

WARNING: By consolidating the above debts into one home loan package you are moving short-term debt into long-term debt. We strongly advise, that you continue to repay the same amount that you have been paying on all your current debt into your new increased home loan account. This will enable you to pay off your debt faster and far cheaper.

Follow the links on the right to navigate to the different sections of our Debt Consolidation Guide or click here to go to the next part of the guide.

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Personal Loans for Debt Consolidation – Why it is not a bad idea?

Debt consolidation can be tricky. The payments can be lower, but that total amount repaid over the term of the loan can be significantly higher due to the longer period of the loan.

A debt consolidation loan will simply transfer the debt to a new lender, although at manageable interest rates and terms, so you still have debt.

Also, it doesn’t help improve your credit score though it might be helpful in managing your monthly payments, so you can avoid late payments or missing the due dates.

Despite all the pros and cons of a debt consolidation loan, it is a good idea to have one especially when you are struggling with several high-interest loans.

Taking an unsecured personal loan to consolidate debt may not work in all cases as the rate of interest you might be offered may range anything from 6% to 25% depending on your credit history.

If you are low on credit score, you won’t find too many lenders offering you a rate that justifies the idea of debt consolidation.

How can you benefit from a debt consolidation loan?

Suppose you have three credit cards or loans with very high interest rates. Each of these has a rate more than 10% and a different loan term.

You approach a lender, such as Bank of America, Chase Bank, Wells Fargo or Capital One for a debt consolidation option. Your lender may suggest a number of ways (in the form of a personal loan, home equity loan or debt consolidation loan) for a better payment option.

  1. You may be offered a debt consolidation loan with a rate less than 10%. Your monthly payment will go down provided the new term will remain more or less the same as the existing ones. Plus, you have one single payment each month instead of three different payments.
  2. You may be offered a loan with almost the same interest rate as you have currently (combined), but your term is increased. This will result into lower monthly payments; however you need to pay more over the entire term of the loan due to the longer period of the loan.

If you take an unsecured personal loan to consolidate debt, then you are generally offered a loan term between 24 and 60 months. Also, you need to have a very good credit score to qualify for a personal loan under 10% of interest. All these factors make a personal loan suitable just for credit card debt consolidation.

How can an unsecured loan be helpful for debt consolidation?

Credit cards usually have very high interest rates. More importantly, if you are making the minimum monthly payments on credit card debt, you are likely to pay only the interest and not the actual principal.

As a result, your debt will remain as it is for several months, and even worse, you might cause the credit card interest rates to go up by missing payments or exceeding limits.

An unsecured personal loan will be a good idea to consolidate all your debt and pay off your credit card balances in full sooner.

The advantages of an unsecured personal loan over a credit card debt can include:

  • A significantly lower interest rate
  • Your interest rate will still remain lower even if you have a bad credit personal loan in most cases
  • A flexible loan repayment term, which can range from 2 to 5 years
  • A fixed monthly payment consisting of interest as well as a portion of your principal
  • One single payment instead of several ones with varying dates, so you can easily keep track of your payment every month
  • You can save money on interest and get out of your debt faster

Is it a good idea to use personal loan for debt consolidation?

It is a hotly debated issue and there can’t be one single answer. It depends from case to case. You can use a debt consolidation calculator to get a clear picture in your case.

For example, if you are offered with a personal loan that has more interest rate than the existing one, then it is definitely not a sensible idea to go for consolidating your debt.

One the other hand, a personal loan with a lower monthly payment and longer term can be useful if you are in financial difficulty at present.

If you can afford, you must always try to go for a personal loan that helps you pay faster and costs significantly lower over the term of the loan.

Free Debt Calculators: Debt Settlement, Debt Consolidation and Budgeting

When it comes to your finances, don’t guess and don’t “do the math in your head.” Instead, use our FREE calculators tool to help organize your finances and get your numbers right and your information straight.

Free Debt Calculators: Debt Settlement, Debt Consolidation and Budgeting

FREE tools to crunch numbers RIGHT!

  • Credit Card Interest Payment Calculator – FREE tool to figure the total interest you’ll pay with only minimum payments
  • Debt Consolidation Calculator – FREE tool to see how much money you can save by paying off debt with a personal loan or home refinance
  • Budget Calculator – FREE tool to see whether you are budgeting enough to meet future financial obligations
  • Debt Settlement Calculator – FREE tool to see if debt settlement is the right option for you

And if you need help after crunching numbers, get a FREE NO OBLIGATION CONSULTATION from Debt Help Lawyers in your area. Most services are FREE to consumers.

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