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Many South Africans are drowning in debt. According to the Reserve Bank, South African consumers are around R1.7 trillion in debt. A study by the World Bank revealed that over 25 million South Africans are in debt to lenders and financial institutions. 1Life Insurance conducted a survey to understand the debt issue. They asked participants if they are in debt and if so, how much it costs them each month. The results showed, on average, 72% of people's income was spent on repaying debt. So, if someone earned R10,000 per month, R7,200 of that was going straight towards paying off debts.
With fluctuating interest rates and an uncertain economic environment affecting the country, as stated by Matthew Le Cordeur in fin24, debt is becoming a bigger and bigger problem, but hippo.co.za is here to tell you it's not all doom and gloom! Financial assistance is available to over-indebted consumers in the form of debt consolidation loans.
A debt consolidation loan is taken out to pay off several smaller loans. The main benefits of this type of loan is you owe only one creditor (the financial institution that gave you the debt consolidation loan), and repayments are often at a lower interest rate over a manageable period of time. The con is that you will be under debt review and cannot get access to any other credit during the review period.
Debt consolidation is a method of refinancing for those who are dealing with overwhelming debt, as it allows them to combine all of their short-term debts, such as store accounts, personal loans, and credit card debt.
You can consolidate your debt in one of two ways. As with any regular loan, you must first meet certain eligibility requirements – the lending institution must ensure you can afford to repay the debt consolidation loan. Once the loan is approved, your bank account is credited with the agreed-upon amount and you settle the debts yourself.
Other financial institutions take a slightly different approach, whereby you provide them with settlement letters from your creditors. The institution then settles your debts directly with those creditors.
Whichever method you use, the lender should give you a manageable repayment plan to repay the debt consolidation loan.
While debt consolidation loans don't immediately rid you of your debt, they might make it easier for you to manage repayments. Also, the amount you end up paying over the long-term is often lower, as you're paying off interest on just one loan, not several.
Debt consolidation services are offered by accredited institutions such as banks and financial service providers. Loans are regulated by the South African National Credit Regulator (NCR) under the National Credit Act (NCA) of 2005, so make sure you use a reputable debt consolidation company that abides by the standards set out by the NCR.
The NCR operates under the national Department of Trade and Industry and promotes fair and non-discriminatory lending practices. It has access to consumer credit records and ensures financial institutions act in the interests of consumers, for example, by lending money only to people who can afford to repay a loan.
If you're struggling with multiple debts and are looking for a way to better manage them, the answer may just be debt counselling. This will help to develop an affordable repayment plan, which might include a debt consolidation loan.
Sources: DispatchLive, BusinessTech, Wikipedia, NCR, IOL (1Life), fin24
Prices quoted are correct at the time of publishing this article. The information in this article is provided for informational purposes only and should not be construed as financial, legal, or medical advice.