Debt Consolidation in South Africa: When One Payment Helps

Juggling several debits and due dates is exhausting. One payment sounds like relief, and sometimes it is.

The question is whether debt consolidation saves money or just feels lighter. Here is how it works and how to check an offer.

What is debt consolidation?

It means replacing several debts with one. There are two main routes:

A consolidation loan adds new credit. Debt review blocks new credit while it lasts. They are different tools for different situations.

When does debt consolidation help?

• The new interest rate is lower than the average rate you pay now.
• You can repay it on time without strain.
• You stop using the accounts you cleared.
• Fees and insurance on the new loan are modest.

When does debt consolidation cost more?

The monthly amount can fall simply because the term is longer. That can raise the total cost. Here is a hypothetical example: R30,000 in debts, consolidated at 24% a year. The figures show interest only, so fees on the new loan add more.

The 36-month loan saves about R824 a month, but it costs about R6,350 more in interest. If your current debts would be cleared in 18 months at a similar rate, the longer term costs more overall, even though the instalment is smaller.

Always compare totals, not instalments.

What are the risks?

• Running up the old accounts again. You end up with the consolidation loan and new debts.
• Secured loans. If you borrow against your home or car, you may lose it if you default.
• Fees. Initiation and service fees and insurance add to the cost.
• Scams. Some “consolidation” offers charge upfront fees and do nothing.

A registered credit provider does not charge you to arrange a loan before it is paid out. See online loan scams.

How can you check a debt consolidation offer?

1. List your debts with the balance, rate and monthly payment.
2. Ask for the written quote on the new loan. See the guide to the pre-agreement quote.
3. Compare the total repayment with what you would pay if you kept the old debts.
4. Check the lender is on the NCR register.
5. Plan how you will avoid using the old credit again.

Should you choose consolidation or debt review?

What are the alternatives?

• Ask creditors for lower payments or more time.
• Pay the highest-interest debt first, and keep the minimums on the rest.
• Debt review, if you cannot pay everything. See what to do when you cannot pay your debts.

Would debt consolidation save you money? A worked example

The test is simple: is the new rate lower than the rate you pay now? Here is a hypothetical household with three debts that add up to R30,000.

The average rate, weighted by balance, is about 23.1%. If a debt consolidation offer comes in at 24%, it costs more than the debts it replaces, even though it gives you one payment. At 18%, the picture changes.

Over 36 months, interest on R30,000 at 24% is about R12,370, and at 18% about R9,050, a difference of about R3,320. These figures use the standard instalment formula and leave out fees, which you must add from the quote.

What should you do with the old accounts afterwards?

The loan pays them off, but the accounts may still be open, with limits ready to use. Handle them carefully:

1. Ask each creditor for a paid-up letter and a statement showing a zero balance.
2. Decide which accounts to close. Keeping one low-limit account in good standing can help your record, but only if you will not use it.
3. Cut up or freeze cards you no longer need, and remove stored details from shopping apps.
4. Check your credit report a month later to confirm each balance shows as nil. See free credit reports.

Without these steps, many people end up with the consolidation loan and a new set of old debts.

What costs can make a consolidation loan dearer than it looks?

The headline rate is only part of the price. Look for:

• Initiation and monthly service fees, which add to every month of the term.
• Credit life insurance, which may be added to the instalment. See credit life insurance.
• A longer term, which lowers the instalment but raises the total.
• Early-settlement terms on the loans you are paying off, because you may owe a settlement amount, not just the balance on your statement.

Ask the lender for the total repayment in rand and compare it with the total you would pay if you kept the old debts. If the new total is not lower, or only slightly lower, the simplicity of one payment may not be worth it.

How do you keep a consolidation loan from becoming a second round of debt?

A consolidation loan only works if the spending that created the debt has changed. Three habits help:

• Write a budget with the new payment in it, and check it every month. See how to budget.
• Keep a small emergency fund, even R500, so that a surprise does not go on a card.
• Track every account you closed or froze, so none quietly reopens.

If your budget shows that you cannot afford the new payment, or you are behind already, debt consolidation is the wrong tool. Speak to a registered debt counsellor about debt review instead.

Frequently asked questions